On Risk To Reward

2025.07.06

CVII

[The Efficient Frontier, Knock-Out Risk, Grab Bag, Expect to Lose Money, Opportunity Cost, Intangibles]

Thesis: If you can minimize knock out risk & actually interested in solving a problem, starting a company may have an attractive total ROI.

[The Efficient Frontier]

Starting a company is an investment, so it makes sense to treat it like one.

When you're investing in anything, it can be useful to break it into two parts:

1. What is the associated risk?

2. What is the expected return?

Both of these are a bit tricky to know if you really got right.

In terms of risk, just because you thought you wouldn’t die skydiving, and you didn't die skydiving, it doesn't mean that you couldn’t die skydiving. In terms of expected return, just because you thought a stock would go up 50%, even if it does go up 50%, it doesn't mean that it was certain or even likely that it would go up 50%!

So, when I tell you that we're about a year into BirdDog now and I think I was right about the risks, you have to understand that I could still be wrong. Even my more sober claim that I over estimated the expected return at the start should be taken with caution.

Still, I'll give an attempt at levelly & rationally reviewing both for your benefit if you’re curious about the perspective of someone who is:

1. Eleven months into a venture

2. Still not rich

3. Still committed to continuing

This take is based more or less on a point in time view of last year when we started BirdDog, and doesn’t really consider things from before then.

[Knock-Out Risk]

Broadly in life, the worst risk is death - it's a Knock-Out Risk, it takes you out of the game forever.

Thankfully, this risk isn't such a concern when starting a business in the US, but there still is another big knockout risk for the business… really, this is perhaps the chief risk there is for a business over all - the company OR the founders can run out of money.

Jack & I have been very conscious of this risk from the start, and have been careful to manage it both for ourselves and for the business.

In regards to ourselves, I am fortunate enough to be able to manage the risk of personally running out of money by spending a lot of time living at home with my parents. I am doubly fortunate enough to have no liabilities or dependents; if I had either, they would factor unfavorably in my decision to go all in on a startup.

It's not strictly necessary to have parents who you can live with to manage this personal knockout risk, though; Jack has been managing the risk by keeping a full time job.

In regards to the business running out of money, first managing the personal financial knockout risk makes it a lot easier for the business to stay afloat. Then, you can focus on making it unit profitable without the burden of the overhead of salaries for two skilled workers.

Beyond that, we limited our financial investment at the very beginning to a (very) small amount & have been (very) frugal with costs since the start. This has had the pleasant effect of making the business fueled by revenue & profitable from very early on. In other words, if things kept going on as they are, we’ve more or less managed away the financial knock out risk.

To contrast this, if we would have taken capital from outside investors, we very likely would be operating with the expectation that we grow at the expense of spending more money than we made. This would re introduce a very real financial knock-out risk into the business; we don't want that, or we wouldn't have been so careful to manage it away. That being said, taking on capital from investors is another way to remove the personal financial knock out risk from the business, but this is a trade off with the businesses financial knockout risk.

[Grab Bag]

Other things that can kill our business would be us giving up or breaking up. The opportunity cost and intangibles explain why we won’t give up. I won’t write about not breaking up here, but if you are starting a business, it is an insanely important thing to manage; I have been in businesses that have failed because of break ups.

Beyond the 3 above knockout risks, if you view the business in isolation, I think there aren’t many other risks to the business:

• Repetitional - If your business becomes 'infamous', as Cluely shows, that can be helpful at the start

• Legal - Don’t do anything illegal. Beyond that, when your biz doesn't have a lot of money, it's not worth it for anyone to sue it.

• Competition doesn't actually matter until it does (depends on the market; I think you need to hit >$5M ARR in our market for it to matter)

• Regulation - If you don't operate in a very regulated space, this is a non issue

• Cyber risk is real but is also in similar to the risk of getting sued; your defense should be increasing as it becomes more worth it to hack you

In other words, if you've managed financial risk, I don't think that anything strictly related to the business is abnormally risky for you as a founder… except for opportunity cost. But, that’s tied to expected value, so we’ll address that first.

[Expect to Lose Money]

It is really hard to predict the financial return of starting a business. If you've managed away personal financial knock-out risk, the safest bet is to assume that you will make $0. And, if you didn't manage away your financial risk, then the safest bet is to assume that you will lose money.

Still, you're different, and your results will be better. So, you set your expectations high. Not very high, though, just at the absolute highest return you've seen from someone else starting a business. But, you are different, so maybe you set it even a little higher than that.

Jokes aside, our expectations on the return when we started BirdDog were certainly slanted by some of the most impressive examples we've seen; it doesn't help that we know someone who have sold businesses for $6M two years after founding, or another who did $25M revenue across the first 3 years of one of his companies.

While our expectations were not that high, they were quite a bit higher than we hit. I think we under estimated some complexities.

First, we thought we'd have something we could sell in the first couple of weeks of starting. This was wrong; the product was barely sellable all the way into month four.

Second, we underestimated the difficulty & importance of building our data into existing workflows, and are still working on solving this problem.

Third, we underestimated the challenge of repeatedly selling real B2B annual contracts.

If you decide to start a business, you'll probably under estimate the difficulty of some things, too. As a result, you'll likely over estimate the expected return in the short term (one year is short term).

But, that doesn't mean that you'll be wrong in the long term. We take solace in the fact that we are actually ahead of schedule in terms of revenue when benchmarked against a mentor who ultimately sold his company for low 9 figures in under 10 years of founding it.

Better yet, because our capital investments were so low, strictly financially, we’ve already made a positive return! But, that completely ignores a very important thing - opportunity cost.

[Opportunity Cost]

Opportunity Cost is how much better the best thing you could be doing would be than the thing you are doing.

Sometimes it's simple: the opportunity cost of doom scrolling tik tok is very high on a sunny day. Other times, it's not so simple: what’s the opportunity cost for starting a company?

If I didn’t do BirdDog, I likely could have gotten a decent job at a consulting firm with a competitive salary that would have paid A LOT more than we’ve made. As a matter of fact, right now, working as much as I am, even a minimum wage job for 40 hours a week would have paid me more than what I’d get if we liquidated BirdDog! So, in that sense, my return on investment is very negative.

But, at the same time, we need to count that by virtue of spending my time on BirdDog, I’ve significantly up skilled myself. Given my new found engineering prowess, now I could likely get a software engineering role that would pay quite a bit more (potentially a multiple) than what I would have made as a consultant after one year.

In this sense, it actually becomes a positive investment.

That is one of the cool things about going all in on a startup - you'll very likely more aggressively upskill yourself than if you weren't doing it. Even this is hard to measure, though, because I don't actually know what job I could've gotten a year ago, nor do I know what job I could get now. However, these two variables are a lot easier to estimate than what BirdDog was going to be worth looking out from a year ago.

[Increasing EV]

Opportunity Cost aside, regardless of how bad we over estimated the expected financial return of BirdDog year one, the actual expected return of year two is much higher than it was in year one.

We have some happy customers, money in the bank, a product that works, something of a brand, and a lot more know how and understanding of the space.

In other words, it’s a lot easier to get to where we thought we would be now from where we are than it was from where we were a year ago.

By virtue of staying in the game, the actual expected return increases. This is part of the reason the entire first part of the post was about managing knockout risk.

[The Intangibles]

Just looking at dollars, BirdDog has been a small positive return. Considering hours input, BirdDog has been a massively negative return. Considering improvement in my opportunity cost, there’s a decent chance it’s already positive.

All of this is without considering that I absolutely love what we are doing at BirdDog, and I love being able to work on it with someone as cool as Jack. I get to aggressively work on the really complex and non trivial problem of very efficiently modeling the world differently based on different user’s outlooks. And, part of the problem is doing so under severe capital constraints, which as I've written about in the past, gives rise to creativity.

That’s worth a lot more to me than working for someone else for a year would have been.

Again, a huge asterisk is that I’ve been able to do away with personal knockout risk by virtue of living with my parents, who I am very grateful for. Still, I think for Jack, who is in a different situation, the trade has also been positive.

Live Deeply,