I recently spent time with someone I’ve known for over twenty years due to the passing of a mutual friend. During our reminiscing and catching up, he commented on my business. “I could not have done what you have done,” he expressed. “I couldn’t take those kinds of risks.”
It’s a topic that comes up often as I visit with business owners, want-to-be business owners, and people who look at business development and wonder how some could take such risks. The idea of investing time and capital into buildings and equipment and managing people, production, accounting and customers with the need to keep it all financially viable can be overwhelming.
Risk and Reward
There is certainly plenty of risk along with hard work involved with building and growing a business and it is widely understood the grim statistics for business success or failure. About two-thirds of businesses with employees survive at least 2 years and only about half survive at least 5 years, according to the Small Business Administration (SBA).
Why do people even try? The reasons vary greatly but summarily come down to the perceived rewards one can obtain from creating something of value, realizing a dream, doing what they love for themselves, solving problems, creating wealth, or a combination of these and other goals.
Even considering what one could achieve, many don’t believe they have the risk tolerance to pursue the entrepreneurial path.
Risk-taking is often considered a requirement for entrepreneurs. They are seen as people with a high propensity for taking risks, willing to give up the security of a paycheck and put their time and resources on the line to chase an idea or a dream.
These perceptions are often perpetuated by heroic tales of entrepreneurs throwing caution to the wind, risking everything and prevailing against all odds by jumping on the right opportunity at the right time.
Risk Tolerance or Decision-Making and Risk Management
Numerous studies have been conducted over the past forty years or more exploring the relationship between entrepreneurs and risk. It seems that it is less about risk-tolerant people seeking to be entrepreneurs and more about entrepreneurs learning how to identify and manage risk in their decision-making and becoming more comfortable with it.
Decision making is generally defined as the process of identifying a decision to be made, gathering information, analyzing and assessing alternatives and making a decision. There exist a number of different styles and methods for decision-making. Two styles that could be viewed as opposite ends of a continuum would be a comprehensive, structured approach compared to an intuitive, opportunistic, ad hoc, or going-with-your-gut approach.
On one extreme, the comprehensive approach to decision-making incorporates a highly structured process, collection of significant amounts of data and analysis, and vetting of a number of alternatives when appropriate. This approach is costly in terms of time and resources and often not a realistic option for entrepreneurs and small businesses.
On the other extreme, the intuitive and opportunistic approach relies on less information and a less structured process. This is viewed by some as careless and much higher risk. Some believe there is a strong connection between opportunistic, intuitive, ad hoc decision making and risk-taking behavior.
A study by Johann Peter Murmann and Deepak Sardana argues that what distinguishes successful from unsuccessful entrepreneurs is precisely that the former vary their decision-making styles, sometimes relying on heuristics and sometimes relying on systematic analysis; in a sense, moving between the two extremes on that continuum of decision making styles. Successful entrepreneurs assess their level of expertise and the level of ambiguity in a particular decision context and then tailor their decision-making process to reduce risk.
Risk management is the identification and assessment of risks followed by the mitigation, minimization and monitoring of those risks.
When we created the Bakken Oil Products & Service Show, we knew the market need existed but there were many risks including significant financial commitment. It wasn’t a comprehensive market study but numerous conversations with nearly twenty companies trying to better connect with clients and prospects in the Williston Basin that provided me that insight.
We mitigated our risks by testing the market before making final commitments. With a tentative agreement with the venue and the event details designed, we went to market with an event registration form.
Within weeks we had sold enough sponsorships and exhibit booths to secure the venue and fund a big chunk of the other fixed costs. Many of the remaining costs would be variable and could be managed based on sales results so I made the decision to move forward. The rest is history and we are pleased to be producing our seventh annual event this fall.
Risk is inherent in all that we do. It always causes me pause when someone states that owning your own business is riskier than being employed. I had a client early in my business that produced aviation awards. He was an airline pilot that had lost his job and much of what he expected to have at the end of a 25-year aviation career.
I’ve heard numerous similar stories of jobs or careers ending far different then they had planned due to company layoffs, market crashes, management changes or conflict and many other risks. I’m not suggesting that you shouldn’t work for a company. I am, however, suggesting that you do not have to be a careless risk-taker to consider entrepreneurship and it’s not any riskier than any other option if approached correctly. I would submit further that as a business owner, you have even more control over your future.
For those currently or those considering building their own business, I encourage you to be a successful entrepreneur, be a calculated risk taker. Leonard C. Green, a successful entrepreneur and instructor at Babson College, tells Forbes magazine that "The difference between risk takers and calculated risk takers is the difference between failure and success.”