What is the best way to manage the possibility of failure without planning to fail? Am I just being too risk averse?
#1 took the IP of his failed startup to China and tried starting another business in exactly the same area, but with Chinese programmers instead of American. Last I heard it hadn't gone anywhere (for exactly the same reasons that the first failed), but money lasts 5 times as long in China.
#2 - a cofounder in the same startup - went to China and opened a school, along with consulting for numerous businesses there. His new venture is doing great.
(#1 and #2 are both independently wealthy from previous startups, however.)
#3 ended up being hired by the business he tried to compete against.
#4 did some consulting work and then took a visiting professorship at a university.
#5 slunk back to the cube farm, then was laid off in the next recession and became a househusband.
#6 slunk back to the cube farm.
Something you should remember: many businesses (particularly ones that don't take outside funding) neither succeed nor fail, but limp along with enough revenues to pay a small staff but not enough to grow quickly. You should be prepared for this possibility and know whether you would want to abandon the startup and go back to the cube farm, or stick it out in hopes of one day making a breakthrough. For startups that are not in hot markets, you'll find that they're significantly more work than a regular job with not much more pay (though you do have more freedom). I know at least 2 other entrepreneurs in this category.
As for the best way to manage the possibility of failure: keep your skills sharp, and make sure that you fail because of things you can't prevent rather than things you can. Most big companies will eagerly hire a top-notch hacker who failed because there was no market for what he was building. Not many will hire someone who had a top-notch market and yet sat on his ass all day instead of building something.
I think that if you're a bright enough person with the motivation to start a company, you'll be fine in the long run. Sure, the months after failure will suck, but you'll bounce back if you're motivated.
Focus on the things you can control. Don't worry about what someone else is doing, just do what you need to do.
My first company flopped (R.I.P. 2002). My second soared but didn't diversify and crashed. That was a hard, hard crash to handle personally, financially. My third is growing slowly, steadily and may have long term value as its industry matures. My fourth is on its way to success. I'm focusing on what it is that matters to me, not looking at what everyone else is doing (or more importantly how well others are doing) and staying true to myself, my talents and areas where projects I'm working on are opportunities, not just ideas. The distinction is crucial.
The worst that could happen? Sitting on a great idea without taking action for too long and regretting it later. The worst thing would be never to try, especially with the costs to entry where they are now.
If you cash out your 401k and empty your savings, and the business fails, then, you're out your 401k and savings. If you go small, fast and cheap, you're alot more likely to fail sooner but fail cheaper as well.
If you take money from others, there is a lot less financial risk for you, but less upside.
If you can set up your financial life so you have less debt and expenses, then you have a lot less to lose.
We're living in a narrow window between the end of the old paradigm (in which individuals had very little power) and the future one (in which you can do anything you want, in a simulated universe). We'll probably get there in another 20-30 years, and everyone will "win" at once.
I'm still at the early stages, and hopefully will not have a great amount of war torn wisdom to share with folks about failing in a year or too, but the odds are stacked towards that outcome, as we all know.