The Perils of Potential: Why Betting on "What Could Be" Can Set You Back

In the world of entrepreneurship and business development, the word "potential" often carries a dangerous allure. The prospect of what could be can be intoxicating, whether you're starting a new venture with dreams of wealth or hiring someone for a key position based on their future promise. However, relying too heavily on potential can be a risky gamble that may lead to significant setbacks on your road to prosperity.

Starting a business is an inherently risky endeavor. Entrepreneurs often launch their ventures fueled by a vision of the future and a belief in their idea's potential. While it's crucial to have a vision, it's equally important to ground that vision in reality. Here are a few reasons why overemphasizing potential can be perilous:

1. Unrealistic Expectations: When potential overshadows practicality, entrepreneurs can develop unrealistic expectations. This can lead to overinvestment in unproven concepts, stretching resources thin and creating financial instability. Developing a personal risk assessment is something that I would recommend. Trying to measure potential is akin to gambling. But by adding some personality parameters, with past successes, along with their desire and passion, you can measure your risk vs. reward and what your chances are of hitting on that hire. Professional sports teams measure potential every year during their yearly draft. They all have different methods and think certain attributes are more important than others, they all have their reasons, but they are drafting who they think that player can become, not necessarily who he/she is. It’s never a perfect science.

2.. Market Misalignment When Evaluating Businesses to Invest In: Sometimes, what an entrepreneur sees as potential is not aligned with market needs. Misreading the market can lead to products or services that fail to gain traction, regardless of their perceived potential. The company will only go as far as the leadership allows it to go. Investors know this, and entrepreneurs learn this. Sometimes entrepreneurs have dwelled so long and so hard to arrange things and become married to their idea and they drift too far away from the front lines. I have found that experts like Warren Buffett, Peter Drucker, and Walt Disney, and legends like this put a high price on the character of the leadership team they’re investing in. When judging potential, they are judging character, integrity, and the way they interact with people when nobody is looking and talking to people who know them. Maybe the market was aligned for a time, but times changed, and your potential lost value because you didn’t pivot and change with the market or change yourself enough to seek guidance. Your business idea can develop ego and investors that sniff that out quickly.

The dot-com bubble of the late 1990s and early 2000s is a historical example of the dangers of overvaluing potential. Companies with promising ideas but little to no revenue were valued astronomically based on their prospects. When the bubble burst, many of these companies collapsed, wiping out billions of dollars in investments. This serves as a cautionary tale: potential without a solid foundation can lead to disaster.

Hiring someone for a key position based on their potential can also be fraught with risk. While nurturing talent and giving people opportunities is important, key positions require proven skills and experience. Here’s why relying on potential in hiring can backfire:

1. Lack of Experience: Potential doesn't always translate into performance. A candidate may have the right attitude and promise but lack the necessary experience to handle critical responsibilities, leading to costly mistakes. The first thing I jump to on a resume is the references. You can gauge risk via references by asking the proper questions about the person you are considering investing in. I will hire someone who is self-taught and has little schooling over someone with a fancy degree who’s socially inept. When someone is self-taught it means they’ve mastered every side of that skill, and they know it front and back. Often, it’s the leader's ego that’s being fulfilled when they hire someone with a fancy resume from a fancy school. Someone self-taught is a metric I use to calculate risk exposure and statistically measure the chances of them progressing into their potential. I love my academia subscribers, too!

2. Training and Development Costs: Developing someone's potential requires time and resources. In key positions, the immediate need for competence often outweighs the long-term benefits of nurturing talent. Just like a professional athlete gets drafted into the perfect system, perfect fit, great team culture. Maybe they slid a little bit in the draft because teams value health and this person had a small heart issue when they were younger but they’re fine now. If you value health over talent, you will draft someone with a clean slate of health. Most people know and unfairly dislike Rudy Gobert who plays for the Minnesota Timberwolves in the NBA. He proudly wears number 27 as his jersey number to remind all of the other 26 teams that didn’t draft him but chose not to because they didn’t believe he could become a 4-time Defensive Player of the Year. The Utah Jazz drafted him originally, developed him, he worked hard to improve, and their “potential metrics” worked great.

On the flip side, the Utah Jazz had the opportunity to draft Chris Paul in the 2005 NBA Draft with the 3rd overall pick and they instead drafted Deron Williams, who was good, but Chris Paul is a Future Hall of Famer. So, you win some and you lose some. It’s no different with an entry-level position.

3. Team Dynamics: Hiring based on potential can disrupt team dynamics. Experienced team members may need to compensate for the new hire’s learning curve, causing frustration and reducing overall productivity. If you’re going through a lot of people and have a high turnover, it’s time to look in the mirror at what your processes are, what adjustments you need to make, and how the ship is being run. I heard somebody say once recently that the seven most costly words in business are, “That’s the way we have always done it.” Culture in today’s day and age must be on point. It must be amazing. You don’t need Neato scooters zipping around the office or the classic ping-pong tables of yesteryear, you need appreciation, you need a celebration of birthdays, and the little things are the big things. When people feel like you care about them, you will get the very best out of them.

WeWork’s rapid rise and subsequent fall is an example of the pitfalls of overestimating potential. Adam Neumann, the company's charismatic founder, was hired based on his visionary potential. However, his lack of experience in running a large-scale business led to strategic missteps and financial mismanagement, ultimately resulting in the company's valuation plummeting from $47 billion to a fraction of that. In his defense, he didn’t see the pandemic coming, and that didn’t help. However not pivoting quickly enough and doubling down on previous methods became his downfall.

While potential should not be dismissed, it must be balanced with pragmatism. Here are a few strategies to mitigate the risks associated with betting on potential:

1. For Starting a Business on Potential: Conduct thorough market research and feasibility studies before launching a new venture. Ensure there is a demand for your product or service and that your business model is viable. This is consistent with businesses or start-ups.

2. For Hiring on Potential: When hiring, prioritize candidates with a proven track record of success in similar roles. Look for evidence of past performance that indicates they can handle the responsibilities of the key position. Look for “Self-taught” in whatever the core competencies of the position are and take that into account. Look for accountability for past mistakes, followed by action to make mistakes right. Some of the most gifted and talented people that I’ve hired didn’t have a sparkling clean background. But they owned it, showed what they had done since, and showed they were hungry. Sometimes mistakes can motivate people for the better and they improve as a result.

3. When You’re on The Fence About Hiring: ?Rather than going all-in on potential, consider incremental investments. Test ideas on a smaller scale before committing significant resources. You could bring someone on for 10 hours the first week, 20 hours the second week, 30 hours the third week, and if they’ve met your barometer of achievement along the way, then they go full-time. A good leader can spot risks before committing to a full-time job. I’ve seen this work because it shows the leader the willingness of the possible staff member, he/she is hiring.

4. Mentorship and Support: If you do hire based on potential, provide robust mentorship and support. Ensure the new hires have the guidance they need to succeed and integrate smoothly into the team. With good mentorship, anyone can succeed. Don’t assume your onboarding process is going to do 100% of the job. Take some extra time as the leader to take them under your wing a little bit. It will accelerate the fate or fortune of that person as you could see up close if your risk paid off. Although I agree action is necessary (with a mentor) avoid the all too common, “throwing you into the deep end!” What that says to the new hire is “Our training is truncated, we are very disorganized, our leadership is inept, and we have only a few solid people holding up our entire organization and you’re just a number to us, so good luck! Be sure to read your company manual.” Just like saying, “Well, we’ve always done things that way” is taboo, so is “you’re getting thrown into the deep end.” It’s more the rule than the exception in some industries. Where there are problems, there are entrepreneurs creating solutions that you might decide to invest in.

To summarize this edition of Science of Getting Rich … The allure of potential is undeniable, but it is a double-edged sword. While dreaming big and believing in possibilities are essential elements of entrepreneurship, they must be tempered with realism and practicality. You’re going to hit on some and you’re going to miss on some. Just like in investing in the market, our losses hurt us more than our gains help us. When you hit on someone you took a chance on, do everything in your power to hold on to that person. By balancing potential with a grounded approach, entrepreneurs and business leaders can navigate the path to prosperity more securely, avoiding the pitfalls that come with betting too much on what could be. One of the people I admire most in this world always said, “You can never say the wrong thing to the right person.” Yes, it’s a numbers game. However, integrity in the way business is conducted is the ultimate differentiator between the amateurs and the professionals.

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