Why The Best Entrepreneurs HATE Risk | Mohnish Pabrai

Key Takeaways

How did you make your money? Give me the highlights of your progression in terms of your own ability to to generate money and then start to invest it. >> I actually never ever wanted to be an entrepreneur. I never wanted to start a business because I had seen so much turmoil >> trauma >> in in my in my childhood, right? And I remember I was like um uh 24 or 25 years old and my dad was visiting me. I was living in Chicago and he tells me it's time to quit and start your own business and uh so I said you know have you forgotten [laughter] have you forgotten my childhood and uh you know all the ups and downs he so my dad just said oh that's what makes life great >> but he said look the company you're you're in my the business I work for had 2,000 people he said you're such a tiny co cog in a such a big wheel you could drop dead tomorrow, they won't even miss you. Okay? You don't matter. And what you really want to to be doing is figure out something where there's an offering gap and um go for it, right? And and I was actually uh getting a little bit frustrated at work because the company had been growing. It was getting more and more bureaucratic. And um so I actually uh started to think about um what might be possible and I didn't have any money you know basically I was 24 25. So what I did is I came I came up with some uh uh IT services offerings that I thought would be pretty unique because at that time client server computing was uh just getting going early 90s and uh so I had about uh $30,000 in my 401k and I said okay we'll worry about retirement later and we pay the penalty. I pulled that out >> nice >> and I I I applied for every credit card I could get my hands on. >> And uh so I had 70,000 available to me in different uh credit limits in credit cards. And so I said, "Okay, we've got up to 100,000 that we can play with." And the third thing that I did is I basically did both. I uh was going to my my job and I had started my company at the same time because basically what I would do is like from like 6:00 to 9:00 in the morning I'd work on my business and then from 6:00 p.m. till midnight I work on my business again and weekends, >> right? >> But somebody was paying the rent. I still had a paycheck and all that. And I said, "Okay, once we have enough revenue, clients, profit, I can quit, right?" And and I always tell uh tell people that basically um if you think about it, there's 168 hours in a week. Your employer needs you for 40, right? And if you live close to work or work remote, the commute time is not that much. And even if you take out time for eating, sleeping, everything else, you have at least another 40, 50 hours that you can engage on something other than work, >> right? >> And I used to always get great reviews when I was starting my business. I said, "Okay, look, the plan is to not get fired. The plan is not to be employee of the year." Okay? [laughter] >> Right? I don't need to overshoot. So I said, I'm going to give them just enough so I'm just above firing level, you know, where it's not so bad that they call me in and terminate me. I need to be above that. Okay. And I did this over 9 months and then I had clients revenue and all that. And I went into my boss and his boss and I resigned, right? And uh they they said you know Mones u we really couldn't figure out last nine months like you checked out. I said exactly. I said my my goal was to just do enough so I didn't get fired. But she said she said yeah we saw a big drop in the old Monish and the new Monish and we talked about it and we actually said it's not so bad that we would fire him [laughter] >> but there's something off. We couldn't we couldn't figure it out, right? And then so I explained to them I was going into a business. My own business was not comparative with theirs. >> And so they said, "Look, when your business fails, not if your business fails. [clears throat and laughter] When your business fails, you can come back. We're going to give you more money. We're going to promote you and you're going to do great." So I said, you know, my my plan was that if I failed when I was going to my business, if I failed, I said, "Look, I got my degree. I can look for a job. I can apply for personal bankruptcy, clean everything off and start over, right? I said, "This is even better. I don't have to look for a job, right? >> I get [laughter] more money, right?" And so, I actually felt like the, you know, people think there's a people have a a false mental model. People think entrepreneurs take risk. Entrepreneurs do not take risk. They do everything in their power to minimize risk. If you think about Buffett's pinball machine business, what was the risk those two 14y olds 14 year olds took? Nothing. Okay, it's $15 in a pinball machine which they could use themselves. >> Worst case scenario, >> $3 $3 in parts. So, the second pinball machine would only get bought when the first one's already producing cash, right? And the third one after the second one. So, basically, there's no risk, right? If it fails, they sell those machines for more than they bought them. >> Entrepreneurs are actually great risk reducers. They start with something that seems risky, but >> so that's the other thing that is a commonality between entrepreneurs and value investors. Uh which is why the same brain cells get used. Both are trying to minimize risk. You know, we as value investors want to go lowrisk, high return. And great entrepreneurs, that's exactly what they're doing. They're going lowrisk, high return. Nobody is doing high risk high return. The only only so if you look at the United States probably around a million businesses more than a million businesses a year get formed in the United States venturebacked businesses um are less than much less than even 1% of that pie might be in most years less than onetenth of 1%. Right? So if there was no venture capital and no ventureback businesses, it would make no difference to the landscape. Okay? We'd still have the million businesses being formed. Ventureback businesses are a different animal because they are high risk, high return, right? The what the VC wants you to do, the VC's got 10 bets. He doesn't care whether your bet works or not. He just wants one of those 10 to work. Yeah. >> So he wants you to step on the gas as aggressively as possible. If you blow up, you blow up, right? Uh when you're an entrepreneur who's not venturebacked, that is not how you go. You don't put just, you know, foot on the gas, you're very careful about downside protection. So what happens >> even some of the big uh big entrepreneurs who Richard Branson I think is the >> people see him as this free, you know, risktaker, reckless sort of guy, but you you've pointed out that that's not true about Richard Branson in this case. One of the stories I love about Branson is when he had the idea to start uh Virgin Atlantic airline, right? The minimum that you need to start transatlantic service is a Boeing 747. [laughter] Okay, it's a couple hundred million dollars, right? And uh Branson got Virgin Atlantic off the ground with no money. So what he did is he calls um directory assistance in the United States 5551212 in Seattle 2065512112 ask for the number for Boeing. Okay. Gets the number for Boeing. Calls the main switchboard and says um I'd like to lease a 747 that you guys might have hanging around that you're not using. They hang up on him. >> Right. >> Okay. keeps calling them and finally the lady at Stitchport says uh let me transfer you to someone who can get rid of you properly right so she transfers him to someone who's head of like commercial sales and so this guy tells him listen Mr. Branson, in every country, we have one customer and you are not the customer in the UK. It's British Airways. And so therefore, there's nothing to talk about. So Richard tells him, "Listen, I I I agree with you. That's fine. But just humor me for a second. Do you have a old Boeing 747 lying around that you're not using?" And he says, "Yeah, actually we do." and if one of your customers like the one in the UK called you, like British Airways called you and they wanted a plane, what would you lease it for? So he says, "Well, I really don't need to have this conversation, but we would lease it for about 200,000 a month." Okay, two or 300,000 a month. And Branson was able to convince Boeing to lease him that 747 because it was sitting and doing nothing. >> Right? Then when he set up uh Virgin Atlantic, he said you get paid for all the future flights in advance because people buy tickets. So the plane's going to fly in April. People already bought tickets in February, right? >> So you say, I got cash coming in 2 months, 3 months before the plane's going to fly and I'm going to pay for the fuel 30 days after that plane lands. Okay? So he had negative working capital and the lease payment is also in areas right. So basically he's he was able to get Virgin Atlantic off the ground with zero equity. Right now the way I look at it is that if if you can start an airline with no money, you can start any business with no money. Right? [laughter] >> Okay. You just have to replace capital with creative thinking. Right?