The Antifragile guide to building wealth
In my previous post the three roads to wealth, I showed that for most people the best possible way to financial independence is to start their own business. I then discussed the reasons why you should do this and the reasons why most people can or won’t start their own business. In this post, I will discuss how to setup your own business in an antifragile manner. Antifragile is a term invented by Nassim Nicholas Taleb, it means an object or system which gains from uncertainty or chaos. A common statistic cited is that 80% of business fail within the first year or only 20% of businesses survive the first year. Possibly this figure is low, if this is the case, what is the best plan for action?
Assume your business will fail, that means when starting up, invest as little as possible and keep expenses and obligations as small as possible. Ideally, you should do all the work yourself, of you need to get outside help, make sure it is done under contract. If possible start the business in your home, later if the business starts making money if you need to expand, rent a place. If you need to rent a place, make sure that you can break out of the rental agreement. If you are working, keep your day job and test your business during your spare time. If you are unemployed, you can experiment with your business while looking for work.
spend an antifragile approach because if you need to bail out of your business, you have minimized how much it will cost you. The logic is only 20% of businesses will survive the first year, if your business is going to fail you bail early. Bailing doesn’t mean always means abandoning the idea, if the idea appears viable, stop operations and restrategize. The problems will result in failure are the problems which you could predict. You ordered 100 widgets from China, you discovered that the marketing cost per widget is greater than you expected. You then need to figure out how to lower marketing costs or abandon the project. That means everyone you know will be getting a widget for Christmas. Put a label on the widget where to order them from, if people like their Christmas widget presents, maybe they will order more from you.
Assuming only 20% of businesses survive, then the solution is to start more businesses after a failure happens. To be able to do this, it means you have to be able to survive each business failure. Run away to live and fight another day. initially, your business doesn’t have to be antifragile, just you have to be. The majority of great generals were defeated because they got into a battle where they were unable to withdraw their forces without substantial losses. This is another reason why you do not want a business partner. Most people have a sunk cost fallacy coupled with pride or ego. Your partner might pressure you to continue on, even if he agrees to cease operations, it will cause bad relations between you. Except for a damaged ego, losing a battle isn’t bad, providing you preserve most of your resources, it will be a learning experience. What you want to avoid is getting yourself into a catastrophic event.
The do everything yourself philosophy doesn’t mean that later on, you will not delegate. Delegation is an important part of expanding your business. One of the reasons I dislike automobiles is that I am at the mercy of the mechanic. If he tells me I need a new transmission, how do I know he is telling the truth? For this reason, running a business which relies heavily on automobiles isn’t a good idea for me. A friend of mine has a van service, 15 years ago, he bought one used Mercedes van he then expanded it to a fleet of over twenty vans. He always tells me the tricks his employees attempt, like claiming they changed the oil, meanwhile they take the oil home or sell it. He isn’t a licensed mechanic but he is able to repair all his own vehicles. If he didn’t have this ability, he would be at the mercy of the mechanics.
If you go camping or on military exercises, you learn that a person’s needs are ?. Enough food to eat for the day, clothes to cover your body and a warm dry place to sleep at night. If you have the time and ability, you can eat quite well for just a couple of dollar a day. If you live in a semi-tropical or tropical climate, for sleeping all you need is enough space for you to lie down and a light blanket. why supplying actual needs isn’t profitable. The world price of rice ranges from $0.40 to $0.60 per kilo, is enough for a day. Buy $2 per day of meat and vegetables, your family can eat extremely well. The reason why commodities are cheap is because they are satisfying needs not wants. The smaller your living accommodations, the fewer expenses you have. There is always a news article, people in some developing nation are living on $3 to $5 per day, this is what the articles doesn’t tell you.
I often joke that squatters in Manila have a better phone and electronic gadgets then I do. Often they have the latest iPhone X, a DVD player, and a large TV set. One of the funniest things I saw was a man who crammed a large screen projection TV into a one room house. To watch the TV, he then built an overhang on the house and sat under the overhang. They then would sit outside the house to watch the TV inside. Granted he probably bought the projection TV second-hand or surplus but he had spent a lot on the TV. Profitable small shops besides carrying staples carry what are essentially luxury items, for women, the big one is whitening soaps and lotions. Squatters are not lazy when given the opportunity to work, they are extremely hard workers. The problem is they are stuck in the sidewalk mode of wealth building. I am not against foreign aid, the problem is the poor are fed a steady mental diet of telenovelas and most foreign aid workers indirectly preach that they are victims.
Squatters spend large amounts of money on baptisms, weddings, and funerals, in many cases an equivalent of 6 months wages. These are examples of satisfying a desire or want, the desire usually is to impress their friends and other people. The point I am making is your job isn’t to satisfy people’s needs but satisfy their wants and desires in a legal way which doesn’t break your moral code. Often the link between the product or service you provide and the desire or want you to fulfill isn’t obvious.
I always ask business owners what they sell and why their customers buy from them, and the answers are often insightful in more ways than one. Many people answer the question directly—“We sell widgets, and people buy them because they need a widget”—but once in a while, I hear a more astute response.
“We’re not selling horse rides,” Barbara said emphatically. “We’re offering freedom. Our work helps our guests escape, even if just for a moment in time, and be someone they may have never even considered before.”
The difference is crucial. Most people who visit the V6 Ranch have day jobs and a limited number of vacation days. Why do they choose to visit a working ranch in a tiny town instead of jetting off to lie on a beach in Hawaii? The answer lies in the story and messaging behind John and Barbara’s offer. Helping their clients “escape and be someone else” is far more valuable than offering horse rides. Above all else, the V6 Ranch is selling happiness. The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future
The V6 Ranch doesn’t sell horse rides, they sell the idea of freedom and escape. Working on the ranch is identified with freedom and escape. How desires are fulfilled are often illogical. Most products sold fulfill a want and desire which might not be obvious. Whether it is a woman buying whitening soap or a woman buying a designer purse, a desire is being fulfilled. A designer purse satisfies the need of something to carry around your possessions, the designer purse satisfies some sort of want inside the person. Men are not exempt from this, they also buy products that satisfy wants inside them. The key is satisfying these wants. So how do you go about satisfying these wants and making money?
Here are the six steps you need to take:
- Decide on your product or service.
- Set up a website, even a very basic one (you can get a free one from WordPress.org).
- Develop an offer (an offer is distinct from a product or service; see Chapter 7 for help).
- Ensure you have a way to get paid (get a free PayPal account to start).
- Announce your offer to the world (see Chapter 9 for more on this).
- Learn from steps 1 through 5, then repeat.
Almost all micro business building follows this sequence of events. Of course, we’ll be discussing specifics as we go along, but it’s always better to start from where you are than to wait for everything to be perfect. The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future
The six steps are self-explanatory. The details will, of course, change depending on your business. A hot dog vendor in a western country that accepts some sort of electronic payment might be a viable idea. Smartphones enable you to accept credit card payments without a merchant account. If enough of your customers use a credit card, later you can use a merchant account.
No battle plan, survives contact with the enemy. - Helmuth von Moltke
As you are proceeding with your plan, ensure there is flexibility built into it. Expect that things will not go according to plan but at the same time look for opportunities to exploit. The most important part of your plan is identifying your product or service.
Here you decide a want, then you figure out if you have the skills necessary to satisfy the want. If you lack all the necessary skills, is it possible to learn these skills? If you can not learn the skills you lack, speaking from experience, you should not go into this venture. The problem is you will need to hire other people, this will increase your overhead and you will become dependent on this. The people you hire, since you do not know how their part of the job should be done, they can slack off or worse yet steal from you. If you attempt to call them on it, they are in a position of power, never allow this to happen. Also if you know how everything operates, if a person decides to quit, worse case you can take that position till a replacement is hired. It makes it easier to train new people and showing your employees that you know all parts of the business gains respect. When problems happen, it will make it easier for you to find solutions.
One you have identified a want and figured out how you are going to solve it, crunch the numbers. If it costs you $5 to purchase widgets, you can sell the widgets for $10 but your costs to sell the widgets are $6 your business will fail. Seems common sense yet I have seen it happen countless times. A person I knew opened a cyber cafe but he paid too much for the computers, he lacked enough capital to buy enough computers, even if he managed to run the cyber cafe at 100% capacity, he would not be able to make a living wage. This doesn’t mean a cyber cafe is a bad business to get into, you have to crunch the numbers. Successful cyber cafes in developing nations are often run by people who are computer repairmen. Since labor is cheaper in developing nations, it is a common practice to fix electronics instead of throwing them away. Often they will buy broken computers and then cannibalize them. His primary business is repairing computers, his secondary business is essentially renting out the computers he can not sell. Since his cost per computer is much lower, he can profit. If the numbers do not crunch, don’t enter the business.
Even with large corporations like Proctor and Gamble, only 20% of their new product launches are successful. Think about that for a bit. This corporation spends millions of dollars on consumer research while developing the product, they get constant consumer feedback. Then they spend millions of dollars marketing this new product they developed and 80% of the time it fails. What can we learn from this? Essentially Proctor and Gamble doesn’t know what it is doing. They are not unique, human resource department in companies spends millions of dollars determining which employees they should hire. Providing each new employee has the basic skills required for the job, choosing resumes randomly is just as effective. Basically, we can determine they don’t know what they are doing. Procter and Gamble’s first successful product was Ivory Soap, an accident. When making soap, they accidentally overcooked a batch of soap. Instead of throwing the soap away, someone decided to use it, they noticed the soap floated. They then marketed it as the soap that floats.
So how do you find out if your product will be successful? By going out and trying to sell it. If you are unable to sell it, you can try switching to a different demographic and reframing how you sell your product. The key is every time you switch, spend as little as possible. As an exercise, you can look at other successful business and see how they got started. Talk to business owners, if they are not busy, they are happy to talk to you. Here is an example of identifying a need and fulfilling it.
My former boss who I worked for when I was younger, founded a business based on this desire. Office workers like to eat snacks while they are working. At the time, I didn’t appreciate his brilliance but with knowledge and hindsight, I can the principles at work. Within an office, there is a limited amount of snacks available, snackers also like to pretend they are eating healthy. For his products he specialized in two types of snacks, healthy ones like dried fruit, trail mix, granola etc, the second type were candy, jelly beans, chocolate covered raisins etc. His marketing model was simple, talk to the gatekeeper of an office, possibly bribe her with a free snack. Drop off a simple flyer with all the products he sold, then have the gatekeeper arrange that he could go into the office lunch room during break time, with all his products. Most office workers would buy a healthy snack like dried fruit to appease their conscience. Conscience appeased, they would then buy a bag of jelly beans etc. Attached to all of his products was a label stating to arrange for another salesperson to come by call __. Once he has a foothold in an office, the products sold themselves. Gatekeepers talk to other gatekeepers, before long, the majority of the office building would be ordering his products.
Initially, when starting out his business, he bought dried fruits and candy in bulk, 50-pound boxes. The initial investment was small, 20 boxes of bulk fruits and candy, empty plastic bags, a bag sealer, a scale and a machine to make labels. At the time, a 50lb box of jelly beans ran $20, he would then repackage them into half-pound bags and sell for $1.50 each. For packaging and storing the materials, initially, he just used a spare bedroom in his house. He has an antifragile business, his initial costs are fixed while he has the potential for infinite gain. They key is, he is able to reach the consumer directly, without having to pay for the rental of retail space. Also since he initially packaged and sold the products himself, when he later hired additional employees and salespersons, he knew what their expected productivity is. Eventually, he broke the city into regions, each region had a salesperson. If he thought the salesperson wasn’t selling as much as he should, he would go out with the salesperson to see the situation on the ground. A side benefit, he would be able to talk to customers and get direct feedback.
The hardest part the owner faced was testing his idea. The only way to test an idea is to go out and test it. He filled his basket full of the snacks he made, then approached his first gatekeeper. Excuse me, Ma’am, would you or any of your coworkers be interested in some of our snacks. Here Ma’am, why don’t you take a look at them? Oh? Are you uncertain about the quality? Why don’t you try some Ma’am? A free sample, in fact, why don’t you hand out some to your coworkers? Here one of the biggest obstacles was the gatekeeper receptionist, to overcome this problem he ensured his salespersons where dressed appropriately for an office environment and where polite to the gatekeeper. If the lobby of the office building contained a bulletin board, he ensured the salespersons would pin a tasteful flyer on it. He started the company before the Internet, people still used things called pagers. It was a device which could only receive phone number, you then found this thing called a pay phone and called the number back. I am sure if he started the company today, he would be using social media etc to look for new clients.
Once he had proven there was a market and he could reach it, he continued the same antifragile philosophy. Fixed risk with a large gain. So he was always ordering test samples of new products, usually 250 pounds worth. He would then repackage and attempt to sell it. If it would not sell, he would say oh well, we will set it aside, maybe I will be able to think of something to do with it. When it came to production, example a packing machine. He would ensure he could afford the loss of the cost of the machine if it didn’t work out. Here again, it was learned by doing, we got a new machine, we figured out how to use it when it arrived. Often the machine didn’t do what it promised.
He would come liquidation centers, place where they sell items from stores that have gone out of business or sometimes products are sent there which can’t be sold. What he mainly was looking for where something cheap which candy could be put in. Example, he found some clear plastic piggy banks in the shape of a dollar sign. He then took them and filled them full of candy. Since he bought the entire lot, he was able to negotiate an extremely cheap price. If it was something heart shaped, he always bought that since it was suitable for valentines day for men to buy for their girlfriends. At least 80% plus of his ideas failed, granted he sometimes would figure out how to remake the failures into successes. So the sample candy that didn’t sell, he would attempt to mix it with other types of candy, attempt different packaging etc.
As he managed to move more product, he was able to negotiate better deals with suppliers. He then negotiated with foreign suppliers to bring in unique types of snacks and candies. To scale his business he franchised into other cities. Since he was purchasing in large volumes, in some cases directly from candy manufacturers, he was able to get discounts. For his franchises they would order in advance, hence the product was already sold before he ordered it. When the containers of product arrived, he would schedule that trucks which delivered to his franchises arrived at the same time. As we unloaded the containers, we would slap new shipping labels onto the boxes and reload into the waiting trucks. He marked up approximately 10%, the boxes didn’t even sit in his warehouse. His franchises even if they contacted they suppliers directly could not get as good of a price, since they lacked the volume.
As you can see, in hindsight, my former boss started a successful business with an initial monetary investment of maybe $500 to $1,000. The success of his business was mainly due to an antifragile approach. Ensure losses are fixed with the potential for huge gains. He had more failures than successes but since his gains were larger than his losses he came out ahead. This is all great information you say, where do I get ideas from?
In Nassim Nicholas Taleb book, Antifragile, he states the longer a technology has existed, the more likely it is going to exist in the future. The best example of this is cooking, humans have been cooking food since they discovered how to use fire, it is safe to presume that they will continue cooking food in the future. The problem is, we are all attracted to new things, the best example of this is technology. Facebook relies on new technology, the idea of facebook itself isn’t new, MySpace, Friendster, AOL Groups etc are all similar ideas. New technology becomes obsolete quickly. Today the programming language of choice seems to be NodeJS, 15 years ago it was PHP, 25 years ago it was Perl. As the IT bubble showed, new technology is extremely risky, sucks, and it is extremely volatile. That doesn’t mean you shouldn’t use new technology but it should be to augment your business as opposed to being your business.
One of my first startups I had was developing a program which handled inventory for a specific type of business. I learned a lot doing it, I also learned how to handle customer relations etc. The failure was it was an extremely limited niche, I could not scale. When it came to looking for similar contracts, I was difficult to expand. Eventually, I gave the business to the partner I had. I made money from this program but in hindsight, I can see why the business was failed from the start. The business itself was reliant on these specific type of businesses, there was no room for growth.
How do you find needs? By looking around, listening to people and attempting to identify a niche. Within this niche, how can you deliver your product or service cheaper or more effectively than the competition. In my previous example, people at work like to eat snacks and candy. Using a fixed amount of risk, my former boss was able to satisfy this demand. Since he came directly to their offices, it made things easier for the office workers. Since he eliminated the need for renting a commercial space, even though initially he was buying the bulk candy and dried fruits at a higher price than his competitors, he was able to offer his products at a competitive price. A book like The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future. The book is useful in that it shows how many people set up businesses that satisfied needs using a small investment, the title lies, in some cases the initial investment was above $100. In every case, the solution involved solving a need that was present by looking at things in a different way. On the other hand, the book doesn’t show all the examples which failed, it makes things look too easy.
You have looked around, identified a need or desire. What do you do next?
The problem is most people talk about ideas but they never do anything to bring these ideas to fruition. If you have an idea, start researching right now, get on the internet, start looking for ways to make it happen. Ideas by themselves are worthless, the idea isn’t worth anything till it is implemented. If your product/idea requires suppliers, start contacting suppliers to calculate costs, do as much research as you can. If you lack the required skills, start researching on how you can acquire these skills.
Your business will require some sort of website presence. Figure out ways to get this web presence, this could range from a WordPress or google blog, where you buy a custom domain to setting up your own web server on a DigitalOcean droplet. One person criticized me for asking for donations when my DigitalOcean droplet only costs $5 per month. Yes, it only costs $5 per a month because I know how to set up my own web server. For the blog itself, I use hexojs, which is a static blog generator, there are options available like Jekyll. How did I learn how to set up my own web server? Ages ago, I rented a cheap VPS, learned how to ssh into it, and learned by doing. I am not advocating that you learn how to setup a web server from a Linux/Unix command prompt, the point is to learn by doing. Maybe my solution isn’t optimal but it gets the job done.
You are probably going to say, you don’t have time etc. Nowadays, there are cheap smartphones or tablets, you can access the internet from anywhere. When you are riding the bus or train, read a book or website on your tablet. If you need to stand in line at the bank, grocery etc, read on your tablet. If you read five minutes here and five minutes there, you probably can gain at least one hour a day. On your tablet, you have a minioffice which fits in your pocket, it has a word processor on it, spread sheet, graphics editing program etc. What do most people use this amazing device for? Posting selfies of themselves on social media or other rubbish.
After you have crunched the numbers, if it appears viable, calculate the minimum investment you need. The idea behind Antifragile, is to keep risk fixed, while potential profit is theoretically unlimited. Expect that you will lose your initial investment, then eventually you will have to make the leap. Ideally, you should be working while you do this, that way if you lose it will not be a catastrophic event. Even if you fail, in the process you will have gained skills which will increase the chances of your next venture. For example, things like learning how to make a web presence can be used in your next venture. If you attempted to get web traffic by buying facebook or other social media traffic, this knowledge can be use again. For $100, you can learn how to target facebook traffic and make bids. You don’t need to spend a lot, learn by doing.
Learn by doing. An antifragile approach is potential loss should be fixed while potential gains should be unlimited. Also, your plans should be more objective oriented as opposed to procedural oriented. This allows more flexibility. It is better to cut out early before the losses become catastrophic. Using a poker analogy, it isn’t how many hands of poker you win, it is how much money you win. And no, I didn’t always follow my own advice, but at least everytime I learned.
I need research money to investigate the economic viability of openning a girly bar. Help contribute to my research by sending me bitcoin, here is my bitcoin address 3NgksauCyuLcVRqLHVLbAnhP2UqmqspJVQ. If your are in the Philipines and need a bitcoin account you can sign up for one at coins.ph.
You can also follow me on twitter at @sir_wankalote, I also have an account on gab @sir_wankalot_here the free speech alternative. If there is a post or topic you would like me to write about, feel free to contact me via twitter or Reddit.