Entrepreneurial Risk

The words entrepreneurial and risk seem almost synonymous. Today’s media and an ever present hope that kissing a frog will produce a prince, we have come to believe that in order to be Entrepreneurial one needs to accept and embrace risk. In fact, we often assume that the more risk that we take on, the more entrepreneurial that we are.

The reality may be quite different. Entrepreneurial and risk may not be a synonymous, they may be polar opposites. While I have no doubt that some entrepreneurs are risk seekers, I am equally certain that most successful entrepreneurs are risk avoiders. In fact there is a large body of evidence that most entrepreneurs became entrepreneurial in order to minimize risk rather than to increase it.

What do I mean by this?

Conventional wisdom indicates that there is a relationship between risk and reward. We are taught from a very early age that if there is nothing ventured there is nothing gained, that it takes money to make money. While each of these statements may be true in some cases, they certainly are not true in all cases or even in the majority of cases.

Some risky ventures have absolutely no chance of success. They are doomed from the very beginning. They are so blatantly absurd that no right minded individual would engage in such risky behavior. Where the chance for success is so minute and the potential reward is so limited, the scheme is a complete waste of time and effort. Yet, some fool will follow such an entrepreneurial venture based solely on the notion that the greater the risk the greater the reward. In reality a truer statement would be: The greater the risk, the greater the potential reward, and even this is not true most of the time.

Peter Drucker, a nationally revered authority on management and creativity relates the following experience on the subject.

A year or two ago I attended a university symposium on entrepreneurship at which a number of psychologists spoke. Although their papers disagreed on everything else, they all talked of the “entrepreneurial personality,” which was characterized by a propensity for risk-taking.

A well-known and successful innovator and entrepreneur who had built a process based innovation into a substantial world wide business in the space of 25 years was then asked to comment. He said: “I find myself baffled by your papers. I think I know as many successful innovators and entrepreneurs as anyone, beginning with myself. I have never come across an “entrepreneurial personality.” The successful ones I know all have, however, one thing and only one thing in common: they are not ‘risk takers.’ They try to define the risks they have to take and to minimize them as much as possible. Otherwise none of us could have succeeded. As for myself, if I had wanted to be a risk taker I would have gone into real-estate or commodity trading, or I would have become a professional painter my mother wanted me to be.”

This jibes with my own experience. I, too, know a good many successful innovators and entrepreneurs. Not one of them has a propensity for risk-taking.

The popular picture of innovators - half pop psychology half Hollywood - makes them look like a cross between Superman and the Knights of the Roundtable. Alas most of them in real life are unromantic figures, and much more likely to spend hours on cash flow projections than to dash off looking for risks. Of course innovation is risky. But so is stepping into the car to drive to the supermarket for loaf of bread. All economic activity is by definition “high risk.” And defending yesterday - that is, not innovating - is far more risky than making tomorrow. The innovators that I know are successful to the extent to which they define risks and confined them. They are successful to the extent to which they systematically analyze the sources of innovation opportunity, then pinpoints the opportunity and exploit it. Whether opportunities of small and clearly definable risks such as exploiting the unexpected or the process need, or opportunities of much greater but still definable risk, as in knowledge base innovation. Successful innovators are conservative. They have to be. They are not risk focused they are opportunity focused.[1]

I do not dispute that in some areas of business, perhaps corporate bonds or some other financial instruments that I have not explored; there may be a closer relationship between risk and the potential reward. However, this I know that in entrepreneurship, in starting and managing a small, medium or even large business, risk alone, is rarely the harbinger of high returns.

I am not suggesting that we avoid all risk; I am not suggesting that we only seek the safety of the tried and the true. I am suggesting that in business we should be seeking to understand the risk, and by understanding risk, find ways to minimize it. That by seeking to understand and minimize risk, we actually increase our chances of success and increase the range our financial gain.

As you embark on the challenge of starting your own business, or as you think of leaving what you think is security of corporate employment, let’s leave the false impression that entrepreneurship must involve outsized risk.

I am suggesting that in small business and entrepreneurial pursuits there is absolutely no relationship between risk and reward.

That many opportunities exist with high risks also have low potential rewards. That just as many if not more opportunities with low risks have high potential reward. If this is the case, and my experience tells me that it is the case, why would one seek high risk, low reward opportunities? It makes no sense.

I believe and I will show you how by understanding risk and minimizing it rather than seeking it out, you can actually enhance your financial outcomes. How you can actually make more money, with greater security by minimizing your risk exposure.

But first we must understand the difference between risk and uncertainty.
[1] Innovation & Entrepreneurship by Peter F. Drucker, Collins Press p139-140