The Art of Taking Calculated Bets in Business Successful high-impact entrepreneurs take calculated bets almost daily. High risks come with high rewards, which in turn are the result of understanding that failure is part of the equation.

Beekeepers know that the more they get stung by bees, the less painful the wound will eventually become and the less their skin will react to the venom in the sting. A beekeeper once told me that although he has always had a deep respect for bees, he no longer approaches a hive with the same fear he once felt when he started his career.

The Same Is True For Entrepreneurs

The more we experience failure, the less painful it eventually becomes. In a weird way, experiencing pain is expected as part and parcel of the entrepreneurial journey, just as being stung by a bee is expected by beekeepers.

I am particularly interested in the psychology of surviving failure and the relationship successful entrepreneurs have with failure — especially the "calculated bets' they take daily.

Failure and Bets

Most entrepreneurs will have you believe that they spend a fair amount of time thinking deeply about the decisions they make before making them and they will refer to them as "calculated bets' that are in line with their strategy. A "bet', even a calculated one, has a good chance of not succeeding.

To move forward and succeed entrepreneurs have to make bets (decisions) daily. Some decisions will be the right ones and others will end up being wrong, but not making any decisions at all is not a luxury that an entrepreneur has.

Two Types of Failure

Failure can be categorised into multiple categories, but I would like to focus on only two categories — above the waterline and below the waterline.

Above the Waterline (ATW) Failure: When this type of failure occurs, when damage happens above the waterline, there is damage to the organisation but no water is taken on-board and the ship ("business') still remains afloat. Bear in mind that too many ATW failures will end up damaging the ship to such a point that it will eventually take on water and sink.

Below the Waterline (BTW) Failure: When this type of failure occurs, the ship takes on water and sinks ("fails'). BTW failures occur when an entrepreneur's bet encumbers enough resources (for example money, reputation, machinery, IP etc.) that the loss thereof would mean the business cannot operate effectively any longer.

The relationship with ATW Failure: As you might expect, entrepreneurs eventually develop a healthy relationship with ATW failure. Like the bee keeper, they gain confidence with the knowledge and experience that they have always survived tough situations, and built resistance to the pain they produce.

As a result of this we see an increased rate in ATW bets over time — relative to the business's size. This curve starts to flatten as the SME approaches corporate size and it then becomes complacent or scared, which ends up leading to the number of ATW bets decreasing relative to its size. This is a sure sign of the beginning of the end.

The relationship with BTW Failure: The relationship with BTW failure is different. When entrepreneurs are in the start-up phase, most of the calculated bets taken are BTW bets. Taking on a new staff member early in the journey and finding out that they cannot do the job could be a BTW event. Losing a single client early (and unfortunately too often with those businesses a few years into their journey) can be a BTW failure. Game over.

As a business grows and builds assets and reserves, so too do the calculated bets move from the BTW category to the ATW category. In a classic supply/demand-type graph, the number of ATW bets increases over time and the number of BTW bets decreases.

The relationship entrepreneurs have with BTW failure remains the same over time. There is deep fear around the outcomes of BTW bets and entrepreneurs avoid them like the plague.

The BTW Dilemma

But, here is the dilemma. There is a thrill experienced when taking on a BTW bet that you can never achieve by taking on an ATW bet. There is an upside to winning a BTW bet that can never be gained from multiple ATW bets.

The media is full of examples of entrepreneurs who cannot resist this type of bet. Elon Musk may be a good current example of this. Cornelius Vanderbilt is a great example from the 1800s. After many years of hard work, he became a shipping magnate and his dominance in the industry was well established. But in his 70s, in a surprise move, he sold his shipping interests and took a bet on the railway industry.

On the one side of the BTW coin is the thrill; on the other side of the coin is the increased probability of losing everything. Those with the guts to take the BTW bet end up living with the sword of Damocles over their head, and those without the guts, live with the pain of boring incremental wins that do not move the dial too much.

Failure Is An Academic Pathfinding Exercise

Over my time spent with entrepreneurs, I have observed that those with the healthiest and most resilient relationship with failure have the closest thing to an academic lens on the process that you can find. They take those bets as carefully as their situation allows, and whether a failure or success occurs, they analyse the "why'.

Where did their decision-making serve them or fail them? What assumptions were true or false? Where did the execution fail or serve? Every failure is information of where not to move forward, every success is information on where to move forward. Failure and success are merely pathfinding inputs.

These entrepreneurs de-personalise the event (success or failure) as much as possible and see it as data that can be used for a better more successful next bet. This may be easier said than done. I have yet to meet an entrepreneur who never felt the sting of failure when they designed a product that failed, backed a team member that left for the opposition or invested in software that never worked.

All we can do as entrepreneurs is move slowly, over time, from a place of taking failure deeply personally to a place where we are coldly analytical and academic about the occurrence. And we might even fail at that.