The 'Stop Loss' Trigger

Comparing starting your own venture with an investment in the stock market is not fair at all. But, there is one concept in the stock market jargon that I feel has some significance for an entrepreneur. A ‘stop loss’ – in simple terms – is a valuable tool (trader’s can’t do without it – but novice investors unfortunately do not use it that often) which helps you keep a cap on the losses. So in case you buy a stock for Rs 100 with the (obvious) expectation that the stock price will rise after you buy it, and unfortunately some event occurs which your diligent analysis could obviously not predict (disturbance in Libya / 2G scam / your investee company’s CEO quits), a stop loss at say Rs 90 would have helped you to keep the possible losses in check.

Coming back to our analogy, a stop loss is essentially an acceptance that as an investor, I could be wrong – and in case I am wrong, rather than throwing good money after bad (‘averaging down’ as is the tendency with many investors) – I might be better off cutting my losses. Thus, for an entrepreneur, a stop loss (and here the loss is not just a ‘capital loss’, but also a lot of ‘time’ and ‘emotional’ loss – which is far more heartbreaking) would be deciding at what time to stop pursuing the idea in case things are not shaping up as expected. In the startup where I worked before, we kept hopping from developing one product to another as we realized why our products may not work. I wonder if it was insufficient analysis of the market or a ‘conformation bias’ that stopped us from quitting early (or not getting into it at all). Similar is the case with one of my close friends who started with something which did not work out and then did something totally different and now he is into something entirely different as compared to the earlier two ventures.

A sense (and the guts) to accept you are wrong is important. Though it might sound like ‘quitting’ (which is generally not taken in a positive sense), you at least live to fight another day!

Cross posted on IdeaBing