I have a metal paperweight on my desk with the inscription, "What would you do if you could not fail?" It's a nice ornament with a feel-good message, but it's completely wrong and dangerous. Anybody can fail at anything. If you start a new venture without first thinking about and limiting risks, you can put your finances and, worse yet, your relationships in jeopardy. What starts as a way to build a dream life during the other eight hours, become your own boss or make a fortune can turn into a nightmare if you don't limit your risk.

A better and more useful message would be, "What would you do if it didn't matter if you failed?" To me, that's much more realistic and powerful. Instead of taking a risk that could end in a cataclysmic strikeout, your goal is to limit the risk of financial catastrophe. This means containing projects so that a swing and a miss doesn't have the potential to ruin your life.

Here are five rules to reduce risk when starting a business in the other eight hours:

Get free help.

You should enlist the support of others. Find service partners willing to invest their time for a piece of the venture's future income instead of upfront cash. The same person who would laugh you out of their office if you asked for a $2,500 investment may gladly trade $2,500 worth of services for a small piece of ownership in a promising new venture. Why? Like you, most people are looking for an opportunity to get ahead without risking too much. If someone can invest a little of their time with the hopes of making a huge return, they may jump at the chance.

Make small bets.

In the investing world, everyone talks about risk tolerance -- a measure that determines how psychologically comfortable you are with the possibility of losing money. This is good to know, but more critical is knowing your risk capacity -- that is, how much money can you afford to lose without it destroying your finances and your ability to pay the rent? Start small and start slowly. Immediately committing thousands of dollars to an idea is as ridiculous as walking up to a girl you've never met and asking her to marry you. You need to put a little out there and get a little back. Then you can put a little more out there and hopefully get a little more back.

Negotiate fiercely.

You must be relentless about getting what you need. You don't have the luxury of a six-figure budget. You've got to get your ventures up and running as cheaply as you can. One way to minimize risk is to negotiate everything. Don't accept anything as is. Negotiate discounts, concessions, bonuses, terms, etc. It will feel awkward at first, but keep practicing.

Limit liability.

If you are producing a product or providing a service that could lead you to get sued, you must protect yourself against lawsuits by incorporating and by having the proper liability insurance. Don't risk financial disaster by failing to shield your personal assets from your business assets.

Keep your day job (at least for now).

It's important to have that steady and predictable income during the day while you swing for the fences at night.

Unless you're sports-challenged, you know that if you get three strikes, you're out. But what if that weren't the case? What if you could swing and swing and swing without ever striking out? A swing and a miss is not a failure when you follow these rules. A swing is simply one swing closer to a hit.

 

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Rules to Reduce Risk When Starting a Small Business

(c) 2010 Robert Pagliarini, The Other 8 Hours