The Game with Alex Hormozi - Two Types of Business Risk | Ep 649

Episode Date: February 5, 2024

“If you can play the game on an unlimited time horizon, then you absolutely should just play it as many times as seemingly possible. But most of us do not have unlimited spins.” Today, Alex (@AlexHormozi) talks about the top business risks that are made by many new entrepreneurs, show you how each risk works (with different scenarios played out), the best ways to approach these, and how the wealthiest figure out ways to play the game in new ways where they can't lose.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(1:02) - The entrepreneur's dilemma: risk vs reward(3:13) - Different approaches to risk(5:29) - The dichotomies in entrepreneurship(6:19) - The new entrepreneur's guide to risk management(7:11) - The role of luck in business success(10:53) - Controlling risk for success(12:56) - The power of risk managementFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition(This episode is a re-run. Original airdate was on July 26, 2022)

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. Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. I'm trying to build a billion dollar thing with Acquisition.com. I always wished Bezos, Musk, and Buffett had documented their journey. So I'm doing it for the rest of us. Please share and enjoy. There are two big risks that exist in business. The first is the execution risk. The second is the idea risk. Now, you could maybe make an argument for a third being, you know, environmental risk, regulatory risk, things like that. But I would say big picture is, does the idea fundamentally work? You know, is having strangers drive kids around in cars going to be a really good idea? Uber, right? Or creating lockers for cats? Is that going to be a good idea? I don't know, right? Or am I going to be able to execute the idea itself?

Okay, so I was having a really good conversation with a friend of mine who's a software entrepreneur. He's had three or four software companies. None of them have really hit. He's about the same age as me. And he and I sit in very different financial positions at this point in our life. And we were having a really in-depth conversation around this topic, which is appropriately measuring risk. And so 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.

And I think this is really interesting because he and I were discussing the first quote that I have, it's kind of, it's in the intro of my book by Jeff Bassis. I'll read it to you right now. Outsize 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 10. We all know that if you swing for the fences, you're going to strike out a lot. But if you're also going to hit some home runs.

The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score a thousand runs. This long-tail distribution of returns, it's why it's important to be bold. Big winners pay for so many experiments. Jeff Bezos.

And so the thing is, is that there are two big costs when you're making these risks. One is you've got the money and things like that, but I think the biggest cost is time. And so if you think about portfolio theory, which is, for example, like venture capital, VCs, though, let's say they take 50 companies on and they're betting the fact that one of those 50 companies is going to, you know, 100x and pretty much carry the return to the entire portfolio. And for the vast majority of the other ones, they either go out of business or basically not really do anything spectacular. And so for the VC, for the venture capital, the investor, it makes sense to take this

approach because they're going to get very good returns using, you know, using this method. Whereas if you are one of the 49 founders who has pretty much all of the net worth invest in this thing, and it takes five years of your life away to only fail, it can be harder to swallow. And so he and I've 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. I tend to be more money focused or money, money driven, whatever you want to say, because I think that the accumulation of money will allow me to do really cool things later on in my life. And when I say later, I mean like, you know, give me 20, 30 years of doing this.

And I think we can do that. Now, the reason that I want to bring up this topic is because picking the business that you're going to go after, I think is a very important question that you're going to ask yourself. And you have to understand that you're probably going to fail many times before you are successful. 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? When do I 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.

And that's what's hard. Because sometimes it's like how many great business ideas have the founders have abandoned six inches from gold where they just needed to push a little bit harder and they were going to have the breakthrough. And I hesitate to talk about the subjects. I think most people just don't know how to push it all. And so, you know, I put that as a big caveat. Now, when we're talking about business in general, I, and this is my difference from my friend, 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, right? And so I think in a lot of ways, this is just Alex's two cents. Most newer entrepreneurs, I think,

would be better served going after boring businesses that have established needs. So people want to have, you know, businesses want more customers. People want to make more money. People want higher paying jobs. People want to have skills that are valuable. People want, you know, to lose weight. People want love. People want, you know, entertainment.

Like, these are all things that are not going to change over time. And so what that allows you to do is hone your skills at business because you know if it doesn't work, it's only you. It's only your. fault if it doesn't work, right? And so because the problem is that having the perspective from which to make a judgment on whether you have product market fit can be, I think, a much harder decision of when to push and when to pivot, you know, as a total side note, because I think this is really interesting. I think there's three big questions that are really dichotomies that you have to manage

as an entrepreneur, right? One is one to push and one to pivot. The second is, how much do I spend versus how much do I, sorry, how much do I consume versus how much do I invest? Right, because you're going to be living your whole life. If you, if you always forego the immediate satisfaction, action, you may reach the end of your life and never have enjoyed anything. Right. So there's a little bit of a balance there that you have to strike, right? And it probably shifts over time, but there still means that there's some level of consumption even early on in your life. And at the same time, you also don't know if you're going to live tomorrow. Right. And that's where it gets really interesting. It's a personal question, right? And the third is, it's kind of the balance between like,

how much do I, you know, delegate to other people versus how much do I do, right? Because you got to do something and you can delegate everything, right? And so there's, there's balances here. And so today, it's just about the push and the pivot and idea risk versus execution risk. And so for the newer entrepreneurs, you probably suck a business. And that's okay. And that's because you're new, which is totally reasonable, totally acceptable. And of course you should suck because it's hard. And a lot of people, right?

And if you want to be in the top 1%, it's 1% of people. That means you have to beat 99 other people out of 100 in order to be the top 1%, which is only 400,000 a year, right? Not only it means a lot of money, right? And so the thing is that Instagram makes everyone feel like if you're not making a million dollars a year, which is not true. You can save 400,000 a year for not that long. long and have a lot of money. You know what I mean? And so anyways, back to the point. 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. And I think as an interesting caveat to this, Jeff Bezos gives this example, and I want to dive into it in a little bit more detail, is that let's zoom out for a second. Let's eliminate Jeff Bezos, Elon Musk, Warren Buffett, from the names that you have in your head. 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? Because if you're competing against everybody, the people who are going to have natural

advantages based on genetic code, upbringing, whatever, are going to, they're going to, they're going to win more, right? So that'd be the first thing we'd want if we wanted to create this person who's going to be likely to win. Number two is they'd have to have a tremendous amount of skill, right? So they'd have the natural proclivity, the nurture that created an environment where they had work ethic to pursue the skill, right? So they have to be very, very good. And then third, they'd have to be lucky, right? Because if you think about a whole bunch of people, like, imagine everybody who's born really, you know, has his natural tendencies or proclivities towards these activities, right? And then does a ton of it in terms of volume. So they get very good. What then separates them?

Look, right? The people at the very, very, very top have all of the, all of the things along. mind, comma, and luck. And so it's interesting that he has this quote around risk, because one of the things that's unique about Bezos and even Elon, right? And this is probably a further discussion on business strategy overall is that they've had virtually limitless access to capital, right? Like, as in they can basically raise money endlessly to fund these risks, right? And so the equation that he said, which is imagine you go to Vegas casino. And there's a table that has a 10% chance of winning, but you get 100 times payout when you do. If you can play the game on an unlimited time horizon, then you absolutely should just play it as many times as seemingly possible.

But most of us do not have unlimited spins, right? And that's where this gets more interesting. Hey, Mosin, a nation, quick break just to let you know that we've been starting to post on LinkedIn and want to connect with you. All right, so send me a connection request and note letting me know that you listen to the show and I will accept it. There's anyone you think that we should be connected with, tag them in one of my or layless posts. And I will be. give you all the love in the world. All right. So let's get back to the show. And so if you were to imagine a dollar as a year of life, okay, that you have in your entrepreneurial career. And let's say to build something really epic would take 10 years. And that's like minimum. You know what I mean?

Like Facebook was 20 is 20 years old, right? Which is kind of insane to think about. I think it's 20 years. Is it 20 years old? I feel like it's 20 years. It's pretty old. It's pretty old. Let's just say 15, right? If you want to build something epic, which means, and how long does it take to test the idea before moving on, right? That's another big question. Like how long does it take to really give it your all on a thing? And so we were having the discussion. And he said, I think we should say $35 would be, you know, you have 35 years of life. And, and, you know, how long do we do we chunk? And we agreed on five years as a midground because it takes 15 to really, you know, see something all the way through. If we said 15 was the chunk, that didn't seem realistic because it doesn't

take you 15 years to find out something doesn't work. Right. And so it's that about way. So we said five was the number. You can come up with your own. Right. And so a more realistic way to see this, right, would be, you know, you've got a one at a 10 shot at a hundred times payout, but the minimum bet is five and you've got 35 bucks. Interesting. The conversation changes. Now, let's say that you're now 15 years in. Let's see you bet three times you lost all three times, which would be reasonable. That would be expected that you'd lose three times. You could even lose all three of the first times. But now you're 15 years in and you have still no money. Oh, how do you feel about yourself?

How do you feel about your skill? What's your reputation? All these things kind of weigh in. You know what I mean? And this is why I think this is a really interesting discussion. And so I will give you my two cents because he and I disagree on these things because I have the perspective that all the people that I know are the wealthiest in the world eliminate risk. So that's what they do.

They control risk. They virtually eliminate it. They figure out ways to play the game in new ways where they cannot lose. Right. I'll give you an example. if the rock came out with a i'm trying to think of something he hasn't come out with because he come out with peril and whatever let's say he came out with uh let's say he came out of the book right let's say let's see the rock writes a book maybe he already has written a book i don't know

and he writes a book what are the what's the likelihood that it's not a bestseller virtually zero right it's virtually zero so he's basically limited the risk because he controls another variable which is a massive audience right and you can build that deliberately and so when we about these things, the richest people that I know control risk and only play games where if they wait, they win. And my friend has not taken that approach. And he's like, hey, I just want to go big or go home. And the thing is that he's gone home more than he's gone big. And so I will give you Alex's two cents and you can choose to do what you want with it. And I'll just explain my views on risk. I tend to go with the highest likelihood bet. And I tend to, if I have two bets, let's say one where I have a 10x payoff for. for a one out of two shot, right, which would be a two to one risk-adjusted return.

All right. If you're curious, you just multiply the payoff by the likelihood. Or is that a 5x? Sorry, I've messed that up. But you get the idea. You multiply the payoff by the percentage likelihood. And if I had an equivalent risk-adjusted return in another one, but I had a higher likelihood of achieving it.

So if I had a 5x that I, or a 6x that I thought I had a 4 out of 5 chance of getting versus a 10x that I had, I don't know the math on it, but whatever, a 1 out of 2-shut. shot of getting, I would pick the four out of five shot that had a lower upside. That's me. And I think part of that is because the games that are set up that way are usually going to be just execution risk businesses. And I feel like I can pay that down in other ways, right? I can pay down that risk so I can virtually, nothing's guaranteed, but I can virtually guarantee the outcome. 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. And so the idea is how can I play, how can I get as many Ws in a row and as few Ls as possible for a long enough time horizon so that I create the outsized return, comma, and get to live a pretty cool and stress-free, or not stress-free, but like a pretty cool life along the way. Right. Now, if we played the game the way that we talked about earlier, where you have the 35 years that you can bet, and your three bets in, you're 15 years in and you don't have anything, that can be pretty hard. Hard on your ego, hard on reputation. Maybe you learn bad habit. There's a lot of things because you won't know, especially if there's an idea risk that's at hand, like, is it me or was it the idea? Right. And so for that reason, I'm in favor of the significantly lower risk. And he and I were talking back and forth. He's like, you know, what I've observed from you is that you just, you go for the sure thing. And that's 100% what. I do. That is, I've always gone for the sure thing. And then I just continue to try and trade up the upside of my sure things. Right. So the first sure thing you can have is a very high paying,

you know, income job. And then the next sure thing would be like, if I were to quit a job, I would make sure that I had more income from my side hustle probably, where I believed it would be very reasonable for me to get that, you know, within a very short period of time. So then I would, you know, make maybe that switch. And then I would look at, you know, all the opportunities that existed and think, okay, what of these things on a risk-adjusted basis? And this is, again, where people make errors. Just assume you have to take the negative assumptions. And I'd say, like, the better I get at this, at thinking this way, the more I continue to make, which is, I'm going to assume everything goes wrong. What then do I make? Right. And so if you can just say,

like, assuming none of the good things that you think are reasonable or going to happen, happen, can you still win? And I think when you think, when you think, that way, what happens is you give yourself room to be pleasantly surprised and exceed expectations. But what happens is when you set up the game that way where you're like, I'm assuming these are the five things that I think will happen and will go right. But I'm assuming none of them are going to go right. Do I still win? And if you can still win, then that is an opportunity worth pursuing, in my opinion. And so that's, that has been the approach that I have taken, which is how can I virtually eliminate the execution risk? Eliminate idea risk by only going after things.

that people I already know want. And then how can I stack the chips in my favor like The Rock, where if I want to write a book, I want to make sure it's a bestseller no matter what, right? How do I do that? And then think about all the things that can go wrong, assume they go wrong, and then think, what would I do in order to still succeed even with all these things going wrong? And then I think when you take those actions, you may not hit the thousand X return. But let's paint a different game that you could play.

So let's say you could play. there's the two games. One was the one that Jeff Bezos outlined, right? Which you got, one out of ten shot at getting a hundred times payoff. The game that I prefer to play is how can I get a three-x payoff with a 95% chance of certainty? And I still have the same 35, right? Minimum bet. Well, I'll bet five and get my three. And then I'll bet my 15 and I'll be at 45. And then I'll bet my 45 and I'll be at up. There we go. I'm already at 120 or whatever. It's already got my 100 times payoff by thinking about it from a risk adjusted basis. Now, it's not going to be sexy. It's not. But if you double or triple or 5x things enough times, you get to the 100x very quickly and you can do

it with limited downside knowing that you've controlled for the idea risk and have only focused on the execution risk, which is yourself.