There is a certain aspect of luck in business. No matter how well you understand the pains of your customer and how good you may be at finding a solution for your customer, there is still a degree of luck at play. This is because there are a lot of external factors that have a role in determining your success and failure.
When luck is against you
I once knew an entrepreneur who had put together an interesting retail venture and was witnessing phenomenal growth. He was so confident of his growth that he signed leases for 2 more locations. He had not raised any money. This confidence was based on the profits he was generating at the time. Unfortunately for him, as his new stores were getting ready, Bangalore witnessed months of consistent rains. Footfalls dried up and along with that accruals.
He had to eventually wind-up his venture.
As I said several external factors can determine your success and failure and often this is not in your hands at all.
Am I asking you not to plan and leave everything to the mercy of chance?
Not at all! To the contrary, you need to plan for chance occurrences and be prepared for them.
The world of finance adds little to no real value and hence they keep coming up with a lot of tools or instruments as they like to call it. Options are one such instrument that is used by a lot of businesses to hedge their risks.
An Option gives you an opportunity to either buy or sell anything at a pre-agreed price at the time of its expiry. As the word suggests you are being given an option and it is not an obligation.
Say, I get into an option position to buy (called ‘Call’) 10 shares of Microsoft at $25. Now, I do not need to purchase the shares right away, but need to pay to secure the option. Let us say I pay $1 to secure the option. Now in the event that I do not make the Call; I do not exercise the option and I lose the $1 dollar I paid to acquire the option. Alternately, If the price is above $26, I can choose to exercise the Option and record a profit.
As I mentioned, the maximum loss is capped at $1 which I have already spent, but there is no limit on the upside. I can make as much profit as possible if the stock were to rise.
Coming back to luck
Much in the same way, when you are starting a venture make sure your downside is limited. Luck will obviously play a role in your success or failure but the smart thing to do is to insure yourself against the chance of things occurring in the future.
Limited downside with unlimited upside potential is the best path to take to ensure that you do not end up in an untenable position.