CFI Blog

Side Gigs and Real Options

“I am a bootstrapper. I have initiative and insight and guts, but not much money. I will succeed because my efforts and my focus will defeat bigger and better-funded competitors. I am fearless.”
– Seth Godin

Seth Godin

I am a firm believer in the power of entrepreneurship. I’ve started and sold a company. I’ve started and failed at a couple of others. While a lot of people rail against corporate America and complain that big companies drive too much of what happens in this country, they also forget that all of these big companies were once small. Just as LeBron James wasn’t born a 6’9”, 250 pound freak of nature, IBM, Apple, and WalMart didn’t just appear with tens and hundreds of thousands of employees. Done right, entrepreneurship can be the highest return on an investment that you can make.

I also want you to have a firm understanding of the prospects which you face. This is not to daunt you, necessarily, but to give you a clear picture of what to expect. A 2007 study by the United States Bureau of Labor and Statistics shows that 44% of companies survive through the fourth year of existence and 31% survive seven years.

If you’re probably going to fail, why start at all?

If you want to start your own business, you may feel like Odysseus at the beginning of his journey back home. Of course, Odysseus had no idea that he would spend ten years wandering the Aegean, so maybe you feel like the all-knowing narrator of the tale. Regardless, if the chances of failure are such that it seems like the odds are stacked against you, why even go through the process?

The biggest reason is that you are creating real options for yourself. As Tim Giles and Chris Walters of the London School of Economics explain, a real option is what you create when you do not have to commit to something right away. It has three components:

  • The option to continue in the future if there is a success. This is important if you do find that you are able to gain traction. You invest some now (as I suggest, $1,000 and 6 months), and if it’s a fruitful investment, then you can choose to invest more later.
  • The option to stop in the future if there is a failure. If you find that your side gig did not work, then you are out $1,000 and have spent six months pursuing it, but you are not going to be left somewhere in a gutter, destitute as a result of your decision.
  • The ability to learn more before committing more resources. Because you are pushing the go-no-go decision into a future period, you’re able to learn more about what your market will bear for whatever you’re offering and reduce the uncertainty about whether or not you will succeed.

The obvious desired outcome of the real option is that you hit a rich vein of need in the market and people are flocking to your door to buy whatever it is that you are providing. This decision is easy; you quit your day job and now you have a new day job. You trade one boss (or a few bosses) for several – your customers.

There are other ways to capture value from the real options of a side gig

You can define success in other ways beyond what would immediately leap to mind when you think about starting a side gig which can ensure that you didn’t waste time and money in trying to build your own business:

  • You can use your side gig as leverage to improve your employment situation. Part of any successful negotiating strategy is the ability to walk away from the table. By having a viable option on the table – your side gig – you have a credible alternative. You’ve shown your willingness to try something new, and if you continue to do a great job at your day job, then you’ve created a clear and present danger that you could leave. Don’t play this as an adversarial discussion, though. Create a situation and present an offer where both sides benefit. This could be more pay, but it could be other things such as work flexibility, telecommuting, more autonomy, etc. However, in exchange, the employer needs to receive something extra that he didn’t receive before. Walk in the room with ten ideas of how you can improve things for your employer and make your boss look even better than he already does so that you are providing value in the exchange.
  • You learn about starting up a business. You can attend every seminar in a hundred mile radius and read every self-help startup book there is on Amazon or in your bookstore, and it will only give you an idea of what running your own business is actually like. Until you’ve actually gone out there and hustled and tried to get people to pay you for something will you truly, in your bones, know what it’s like. If you’re a parent, you know what this feels like – nothing could prepare you for the arrival of your first child. You could ask people until you were blue in the face about what it was like and what you needed to do to prepare, but once the baby came home, it was a whole new ball game.
  • You get an idea of what people are willing to pay for. Even if you didn’t succeed, you probably got a few people to either pay you or to reveal what they would pay for. The next time you try, take those seeds of information and focus on them.
  • You get more expertise. In order to get someone to pay you for something, there generally have to be two conditions:
    1. You can do it better than they can, or
    2. You can make it more convenient for them.
  • It’s usually easier to win in business if you’re better at something. You don’t have to be an absolute expert, but you have to be a relative expert. In your journey, you should have also improved at your craft. There should be other areas in your life or your career where you can employ this improved capability.
  • You gain confidence in case the corporate world doesn’t work out. It’s crucial to have this confidence. Unless you work for the federal government, there’s no reasonable expectation that you’ll stay with one employer for forty years and retire with the golden watch. You always want to create great value for those for whom you work, be it for your boss or for your clients, but nothing is ever a certainty with a job. Even trying and failing at a side gig will give you invaluable experience and lessons to learn to improve your chances the next time if you find yourself in a situation where you don’t have a job.

Failure doesn’t have to be absolute. Not succeeding in one venture doesn’t preclude you from succeeding in another. It can also be an opportunity to improve your career with your current employer. By properly framing up what you want to get out of a side gig, you can come up with many definitions of success.

Do you want to start a side gig? What do you want to accomplish out of it? Have you successfully leveraged a side gig into something more? Tell us about it in the comments below.

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John Davis
John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.

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