The need for a framework arose when I realized it was difficult for me to retain an objective point of view when my ventures were cross fading between economic cycles. Instead of troubleshooting, which made things worse, it would have helped if there had been a list of common diseases, symptoms, and cures that I could refer to figure out what had gone wrong and what I needed to do to fix it. Page 69, Expectation Management: first shoot your partner in the knee and then tell him if he talks about moving on to something better again, you will cap the other one, too.
When the framework was first put to work, it was obvious that I needed to think about degrees of failure. Is it just a runny nose, a bad cold, viral flue, or full- blown pneumonia? The severity of illness determined the aggressiveness of treatment. The benchmark I used was the amount of time it took to get back on your feet after failure. At times this was dependent on the magnitude of financial loss caused by failure, while occasionally non-financial factors such as attachments, relationships, credibility, self-confidence, promises, and the psychological mindset determined the length of the recovery period.
The recoveries fell in one of the following three broad categories:
Type I, a.k.a. the no commitment date, is a failure without any major financial costs. You come up with an idea; you throw a little money at it, test the waters, do not get the right response, pull the plug, and step out as soon as you get your feet wet. Your total investment is limited to 4-12 weeks of your time and less than 5% of your net worth.
Type II, the fair-priced joy ride, is a failure with significant financial costs. Moving forward with the above theme, after testing the waters you actually go for a swim, find the current too strong, get stung by a jellyfish, pull a muscle, get a cramp, and almost drown before heading back to the shore. Timeframes could run into years, personal losses claim a substantial portion of your and your friends’ and families’ net worth, and recovery from this misadventure is spread over multiple years. Called the fair-priced joy ride because you knew what you were getting into, you had your fun and your chance, took your shot and missed. Charge it to the experience account.
Type III, the tailspin, is failure with substantial financial costs. You go for a swim and are never seen again. Type III failures generally result in complete financial wipeouts and tremendous personal emotional strain. Recovery from such failures is very rare and requires serious intervention by friends, family, and well-wishers. I have seen a few Type IIIs and the only thing I could do to help was turn and walk away.