2 Types of Business Risk Ep 414



Alex Hormozi, the host of the podcast and the founder of acquisition.com, discusses the nuanced understanding of risk in entrepreneurship. He contrasts his approach to business with a friend's, highlighting the pitfalls of overestimating success and underestimating failure. Hormozi emphasizes the importance of recognizing the 'graveyard' of failed ventures and advocates for pursuing low-risk ideas with established demand, rather than chasing potentially groundbreaking but riskier ideas. He stresses the significance of execution over idea risk and advises newer entrepreneurs to focus on 'boring businesses' to refine their skills. Hormozi also touches on the importance of timing in deciding when to persevere with an idea or pivot, and he shares his personal strategy for risk management, which involves going for 'sure things' and allowing for compound growth over time.

Summary Notes

Picking Businesses and Understanding Risk

  • Alex Hormozi discusses the inherent risks in choosing business ventures.
  • He contrasts the ambitious approach of his mentors with the reality of many failed attempts that go unnoticed.
  • The wealthiest people view business as a strategic game.
  • Hormozi aims to share his business lessons to help others grow and potentially partner with his company.

"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."

This quote highlights the difference in mentality between those who aim to make a huge impact versus those who recognize the large number of failed attempts that are often not acknowledged.

The Game of Business

  • Hormozi uses the metaphor of a game to describe his business journey and the creation of acquisition.com.
  • He emphasizes the importance of learning from experiences to achieve significant business growth.

"The wealthiest people in the world see business as a game. This podcast, the game, is my attempt at documenting the lessons I've learned on my way to building acquisition.com into a billion dollar portfolio."

The quote conveys Hormozi's perspective on business as a competitive and strategic endeavor, likening it to a game where lessons learned can lead to significant wealth and success.

Risks in Business

  • Hormozi identifies two primary risks in business: execution risk and idea risk.
  • He suggests that there might be other risks such as environmental or regulatory, but focuses on the viability of the business idea and the ability to execute it.

"There are two big risks that exist in business. The first is the execution risk. The second is the idea risk."

The quote succinctly categorizes the main risks entrepreneurs face when starting and running a business, emphasizing the importance of both a sound idea and the ability to effectively implement it.

Entrepreneurial Mindset and Risk Assessment

  • Hormozi reflects on a conversation with a software entrepreneur friend about the misjudgment of risks by new entrepreneurs.
  • They overestimate the potential rewards and the likelihood of success while underestimating the costs and the probability of failure.

"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."

This quote emphasizes the common mistake among entrepreneurs of having an overly optimistic view of their venture's potential success and not fully appreciating the risks involved.

The Wisdom of Jeff Bezos

  • Hormozi shares a quote from Jeff Bezos about the nature of returns in business and the importance of being bold.
  • Bezos notes that while most conventional wisdom is correct, the potential for outsized returns justifies taking unconventional bets.
  • The distribution of returns in business can be long-tailed, with occasional massive successes.

"Outsized returns often come from betting against conventional wisdom. And conventional wisdom 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 nine times out of ten."

This quote from Jeff Bezos, shared by Hormozi, illustrates the rationale behind making high-risk, high-reward business decisions and the acceptance of frequent failures in pursuit of exceptional success.

The Cost of Risk and Portfolio Theory

  • Hormozi discusses the concept of time as the biggest cost when taking risks.
  • He explains portfolio theory in the context of venture capital, where many investments are expected to fail, but a single success can cover all losses.
  • The experience of the entrepreneur is contrasted with that of the investor, with entrepreneurs bearing a higher personal cost in case of failure.

"And so if you think about portfolio theory, which is, for example, like venture capital, VCs, let's say they take 50 companies on and they're betting the fact that one of those 50 companies is going to 100 x and pretty much carry the return to the entire portfolio."

This quote explains the strategy behind venture capital investments, where a diversified portfolio allows for the high likelihood of failure in individual ventures, with the expectation that a rare success will provide substantial returns.

Valuing Risk and Career Outcomes

  • Hormozi reflects on the different career paths and financial positions between him and his friend due to their differing attitudes towards risk.
  • He acknowledges his friend's desire to achieve something significant, while Hormozi himself is more focused on accumulating wealth for future opportunities.

"And so he and I have had very different careers and lives, and it's because 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."

The quote illustrates the personal nature of risk tolerance and how it can lead to different entrepreneurial outcomes, highlighting the importance of understanding one's own motivations and goals.

The Entrepreneurial Dilemma: Push or Pivot

  • Hormozi touches upon a crucial decision entrepreneurs must face: knowing when to persevere with a business idea or when to change direction.
  • This decision is framed as one of the hardest questions in entrepreneurship, with significant implications for success or failure.

"And one of the hardest questions in entrepreneurship, and this is also one of the things that come up in the conversation, is when do I push or when do I pivot right. When do I keep pushing?"

This quote addresses the challenging nature of strategic decision-making in entrepreneurship, where the choice to persist with an idea or to adapt can be pivotal to the venture's outcome.

Perseverance vs. Pivoting in Entrepreneurship

  • Entrepreneurs often struggle with deciding whether to persevere with an idea or to pivot.
  • It can be difficult to determine if the issue lies with the entrepreneur themselves or the business idea.
  • There's a risk of giving up on a potentially successful idea too soon.

"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."

This quote highlights the central dilemma entrepreneurs face when their business is not performing as expected: whether the problem is with their approach or the viability of the idea itself.

Low-Risk Business Ideas

  • Alex Hormozi suggests pursuing business ideas with established needs to minimize risk.
  • Focusing on "boring businesses" allows entrepreneurs to develop their business skills.
  • When a business with an established need fails, it's likely due to the entrepreneur's execution, not the idea.

"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."

Alex Hormozi expresses his preference for pursuing business ideas that have a clear demand, thereby reducing the idea risk and leaving execution as the primary challenge.

Entrepreneurial Dichotomies

  • Entrepreneurs must manage dichotomies such as when to push vs. when to pivot, consumption vs. investment, and delegation vs. personal involvement.
  • These decisions are often a balance and can shift over time.
  • The balance between immediate satisfaction and long-term investment is a personal decision.

"There's three big questions that are really dichotomies that you have to manage as an entrepreneur, right? One is when to push and when to pivot. The second is how much do I spend versus how much do I consume versus how much do I invest."

Alex Hormozi discusses the critical decisions entrepreneurs need to make, which involve balancing opposing actions or strategies.

New Entrepreneurs and Business Challenges

  • New entrepreneurs are likely to lack business skills, which is normal and acceptable.
  • Being successful in business is challenging and requires surpassing the majority of competitors.
  • The perception of wealth and success on platforms like Instagram can distort reality.

"For the newer entrepreneurs, you probably suck at business, and that's okay. And that's because you're new, which is totally reasonable and totally acceptable."

Alex Hormozi reassures new entrepreneurs that it is normal to struggle with business initially due to inexperience.

The Graveyard of Failed Ventures

  • There is a tendency to overlook the many failed attempts by entrepreneurs who aimed too high.
  • Alex Hormozi contrasts his approach with mentors who encourage going after world-changing ideas.
  • The successes of people like Jeff Bezos are the exceptions, not the rule.

"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."

This quote points out that for every high-profile success story, there are numerous entrepreneurs whose ambitious ventures did not succeed, which often goes unnoticed.

Requirements for World-Class Success

  • To be the best in the world at something, one would likely need natural talent and a tremendous amount of skill.
  • Competing at the highest level often means going up against individuals with innate advantages.

"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."

Alex Hormozi posits that to be the best in the world at something, it often requires inherent advantages, suggesting that not everyone can reach the pinnacle of success in every field.

The Role of Nurture, Skill, and Luck in Success

  • Nurture creates an environment that fosters work ethic.
  • Skill is developed through a large volume of practice.
  • Luck differentiates those at the very top despite having similar nurture and skill.
  • Successful figures like Bezos and Musk have had almost limitless access to capital to take risks.

"the nurture that created an environment where they had work ethic to pursue the skill."

This quote emphasizes the importance of a conducive environment for developing work ethic, which is essential for skill acquisition.

"So they have to be very, very good. And then third, they'd have to be lucky, right?"

The quote underscores that in addition to being highly skilled, individuals must also have luck to reach the pinnacle of success.

Business Strategy and Risk

  • Bezos and Musk's strategy involves taking calculated risks due to their ability to raise substantial funds.
  • A metaphor used is a casino game with a high payout but low probability of winning.
  • The concept of an "unlimited time horizon" is crucial for taking risks in business.

"they've had virtually limitless access to like, as in they can basically raise money endlessly to fund these risks, right?"

This quote points out the unique advantage that some entrepreneurs have in being able to continuously raise capital to support their risky ventures.

Entrepreneurial Time Investment and Risk Management

  • Entrepreneurs must decide how long to invest in an idea before moving on.
  • The discussion suggests using five years as a reasonable period to test an idea.
  • This period is balanced against an entrepreneurial career span, hypothetically 35 years.
  • The conversation shifts when considering the number of attempts and the time invested in failed ventures.

"How long does it take to really give it your all on a thing?"

The quote raises the question of the appropriate amount of time to dedicate to a business idea to fully test its viability.

"And so a more realistic way to see this would be you've got a one out of ten shot at 100 times payout, but the minimum bet is five and you've got $35."

This quote presents a more realistic scenario of risk-taking in entrepreneurship, likening the years of an entrepreneur's career to a finite amount of currency to bet on business ventures.

Wealthy Individuals and Risk Elimination

  • The wealthiest individuals are perceived to control and virtually eliminate risk.
  • They find ways to ensure success by manipulating variables within their control.
  • Examples include leveraging a massive audience to guarantee the success of a product.

"They virtually eliminate it. They figure out ways to play the game in new ways where they cannot lose."

This quote suggests that the most successful individuals find strategies to minimize risk to the point where loss is not a factor in their ventures.

Alex Hormozi's Perspective on Risk

  • Alex Hormozi prefers high likelihood bets over high payout but low probability ones.
  • He calculates risk-adjusted returns by multiplying the payoff by the likelihood of success.
  • His approach contrasts with others who may prefer a "go big or go home" strategy.

"I tend to go with the highest likelihood bet, and if I have two bets, let's say one where I have a ten x payoff for a one out of two shot, which would be a two to one risk adjusted return."

This quote illustrates Alex Hormozi's method for evaluating risk, favoring bets with a higher chance of success even if the payoff is lower, thus optimizing risk-adjusted returns.

Risk Management in Business Decisions

  • Alex Hormozi favors lower-risk opportunities with a higher chance of success over high-risk, high-reward options.
  • He believes in reducing execution risk through meticulous planning and execution.
  • Hormozi emphasizes the importance of compounding small, virtually guaranteed successes over time to achieve outsized returns.
  • The goal is to accumulate many wins and minimize losses to leverage the power of compounding.
  • He also values living a fulfilling life while building success, rather than taking on extreme stress.

I would pick the four out of five shot that had a lower upside.

This quote illustrates Hormozi's preference for opportunities with a higher probability of success, even if they offer lower potential rewards.

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 outsized return.

Hormozi is explaining his strategy of stringing together multiple successes to benefit from compounding, which he believes will ultimately lead to significant returns.

Decision-Making Framework

  • Hormozi opts for a conservative approach, selecting "sure things" and progressively increasing their upside.
  • He stresses the importance of risk-adjusted decisions and preparing for negative outcomes.
  • By assuming the worst-case scenario, Hormozi positions himself to be pleasantly surprised and exceed expectations.
  • The approach involves eliminating both execution and idea risk by choosing opportunities that are already in demand.

I've always gone for the sure thing, and then I just continue to try and trade up the upside of my sure things.

This quote reflects Hormozi's consistent choice of low-risk opportunities and his efforts to gradually improve their potential upside.

Assuming none of the good things that you think are reasonable are going to happen happen, can you still win?

Hormozi advocates for a mindset that prepares for the possibility of everything going wrong, ensuring that one can still succeed under those circumstances.

Execution Over Idea Risk

  • Hormozi focuses on controlling execution risk, which he feels is manageable, rather than idea risk, which is more uncertain.
  • He suggests only pursuing opportunities with a clear existing demand to minimize idea risk.
  • When considering potential pitfalls, he plans how to succeed despite them, which reduces the fear of failure.

How can I virtually eliminate the execution risk, eliminate idea risk by only going after things that people I already know want.

This quote encapsulates Hormozi's strategy to mitigate risks by focusing on proven demands and executing effectively.

Risk-Adjusted Growth Strategy

  • Hormozi contrasts his preferred low-risk growth strategy with the high-risk approach outlined by Jeff Bezos.
  • He demonstrates how a series of smaller, more certain bets can compound to achieve significant returns without taking on excessive risk.
  • This method involves controlling for idea risk and focusing on execution, which relies on one's own abilities.

The game that I prefer to play is, how can I get a three x payoff with a 95% chance of certainty.

Hormozi describes his preferred method of achieving growth by making safer bets with high certainty, which he believes can compound to substantial payoffs.

Closing Remarks

  • Alex Hormozi concludes by expressing gratitude to his audience, "Mosie Nation," and encouraging them to engage with future content.
  • He hopes the discussion of his risk management and decision-making approach will provide valuable insights to his listeners.

Mosie Nation, love you guys. I don't deserve you, but hype, I love you for being as awesome as you are.

Hormozi ends with an affectionate message to his audience, showing appreciation and humility.

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