The Power of Protecting the Downside in Risky Ventures
I was recently at an event where Sir Richard Branson spoke. He shared many gems, but one that stood out was the importance of protecting the downside, particularly when you're pushing boundaries - in business and personally.
The story of how Sir Richard started his airline is a brilliant example of pursuing a bold idea and protecting the downside. It’s my favourite example of successful entrepreneurial risk-taking.
The start of Virgin Airlines
The story, which I’m sure many of you are familiar with, goes that Sir Richard was due to fly to the British Virgin Islands (BVI) to head to his private island, Necker Island to meet up with, in his words, “a lovely lady”. This was in the early 80s. His flight was suddenly cancelled. “I was livid because I hadn’t seen her for three weeks,” Branson recalled in an interview with CNBC.
Not one to accept a dead end he marched to the back of the airport and gave them his credit card, hoping it wouldn’t bounce, and hired a plane. He then found a blackboard and wrote Virgin Airlines “as a joke”, and one-way $30 to the Virgin Islands. He filled the flight with all the bumped passengers.
Arriving in BVI someone commented, “Sharpen up your service a bit and you could be in the airline business.”
The next day he rang Boeing and said, “I’m thinking of starting an airline.” As you do.
His Board must have nearly had a nervous breakdown when he shared his plans. I’d love to have seen their faces. Not surprisingly they were a tad apprehensive. He was talking of taking on the likes of British Airways, PanAm and TWA with their hundreds of planes. The likelihood of success was low.
Buying a plane wasn’t an option. Standard plane leases are 5-10 years – while cheaper than buying it was still expensive and risked being left with a pricey lease and no business.
Branson negotiated hard and managed to get a one-year lease. In doing so, he had taken a big step in protecting his downside and it enabled him to go after a high-risk business initiative.
“It is only by being bold that you get anywhere. If you are a risk-taker, then the art is to protect the downside,” Richard said.
It’s such a brilliant example of how you can go after a high-risk goal. Those risk-reducing measures are the fine line between reckless and smart risk-taking.
Protect your downside
It’s what I’ve been part of and seen done extensively in the corporate world. This principle applies in our personal lives as well as business.
When I looked at the risks of my Nile expedition there were many potentially fatal risks.
It’s why I invested so much time in the preparation – training, research, getting the right support. It was all about protecting the downside. It drove decisions on when to go and what type of craft to use, the medical supplies to take, the backup equipment, and the multiple insurance policies I got.
Without all those measures, I’d never have undertaken such a high-risk venture.
Protecting the downside can give us the confidence to move forward with something that we’d otherwise back away from.
Putting it into action
The steps are simple:
Identify what can go wrong – what’s worst case?
How significant is that worst case – is it beyond what you’d consider?
What measures can you put in place to get to a level that you’re comfortable with?
It’s like putting a blocker between the sh*t and the fan. Things will potentially go wrong, but you limit how damaging it is.
It’s why founders of startups are encouraged to have a minimum viable product (MVP) before investing thousands, or even millions in their idea. It’s a way of protecting the downside. Eric Ries described the term in his book, The Lean Startup.
The idea is it is to get a product with a minimum number of features that solves the most important problem for customers and get it out as quickly as possible. You get to validate the product and learn about the customers and potential demand for the product.
It's starting something as a side hustle before quitting and going full-time on an idea.
When Sir Richard hired the plane to get to BVI, he could have protected the downside there by getting people to buy their tickets before he paid to hire the plane.
If you’re starting a business, or have some kind of personal venture with a high degree of risk, what’s the equivalent of leasing rather than buying an aeroplane for you?
Summary
For me, I’ve found this approach of working out what can go wrong and then dialling the risk back to a level that I’m comfortable with incredibly valuable. It has given me the confidence to take risks I would otherwise not consider.
Sir Richard Branson says, "My interest in life comes from setting myself huge, apparently unachievable challenges and trying to rise above them.” He's certainly done that.
If you have a goal that scares and excites you..but the scariness is putting you off, try this. It might be enough to give you the confidence to take the next step and not financially or literally cripple yourself in the process. You get to explore things you might otherwise never consider. And who knows where that might take you….