Entrepreneurs Are Not Risk Takers

This is the first of a two part section on entrepreneurial risk.

Risk is not the same as calculated risk:

I often tease my Economics friends that their theories only hold “ceteris paribus”—“all else held equal.” What relevance is this for entrepreneurs? Entrepreneurial activity does not operate in a vacuum. Everything is always in motion. Entrepreneurs have more balls in the air than a circus juggler. In fact, startups can never operate “ceteris paribus.”

As a teacher of entrepreneurship, I always told my students that the market is always your guide. Don’t overly focus on one concept with your eyes in a blinder. Your journey is not a sprint but rather a marathon. Before starting on the entrepreneurial marathon, learn the rules of the game. Know your industry well so that you can play better. Understand the strategies, business models and nuances. Focus on uncertainty reduction. Reduce the risks of a mistake. Most successful entrepreneurs use many sources and concepts to reduce the risk factor.

Startup behavior is really not about taking risks, but systematically thinking about potential losses and pitfalls thus, reducing risk and uncertainty. Startup activity is a calculated risk that includes all possible factors, not excluding variables. The successful entrepreneur decreases uncertainty through a number of ways. The entrepreneur should think then know how much is required to stay alive until becoming cash flow positive. Perseverance is a genuine entrepreneurial trait, but at some time the founder must realize when it is time to stop. Saras Saravathy calls this concept “affordable loss.” Spend only what you can afford to lose. The same concept holds true in negotiation: Your BATNA (Best Alternative to a Negotiated Agreement) is to the negotiation what affordable loss is to entrepreneurs.

There are many ways to reduce risk in a startup.

The first is to get a good mentor. Get two or three mentors. A Mentor is a person whose hindsight becomes your foresight. Use their wisdom.

Get out the door and go network, meet people. Meet the HIPPOs—the Highest Industry’s Paid Persons Opinion. These are the smartest guys and gals in the room. Sometimes money can’t buy these opinions, but if entrepreneurs can offer something really interesting and exciting – like a cutting edge product. A HIPPO may be hungry for this new knowledge and be interested in helping your project. After all, HIPPOs need that information to stay on top of the food chain. Industry knowledge is a key success factor. If your research can offer something to the HIPPO that they did not already know, then you may have your foot in the door to success.

There are other basic risks that must be addressed. Is the targeted market big enough to support your growth business? Can you find and retain the appropriate talent. Is your intellectual property sufficiently protected? Can your team execute and deliver? Can you manage your accumulated financial losses until you are cash flow positive? Do you know all the premises behind your financials, cash position and cash flow to survive the turbulent start? Do you understand where every dollar of your funds goes and how that spending action adds value?

Understanding the underlying processes, and flow of you’re your company before embarking on the entrepreneurial journey will pay off when you are ready to launch. Knowing these key characteristics is all about reducing the risks of a startup.

More in the next post.

Entrepreneurs and Athletes – Just Like Mike

The staff opened the doors to my gym in Los Angeles particularly early one day. At 5:00 am, there was only one other person with me in the facility. As I stepped on the treadmill, I noticed out of the corner of my eye that the other early bird in the gym was a large athletic fellow on a stationary bike. It was early in the morning, and I was in robotic mode; I wasn’t thinking much, I wasn’t noticing much. I was simply focused on the run and the tunes in my iPod.

He was pumping hard on the bike and finally I heard grunting noises through my sound isolating earbuds. This was very loud grunting from someone who clearly didn’t care who heard him. I glanced over and did a double take, noticing the mans’ distinctive facial tattoos: Mike Tyson working out in my gym. Mike reminded me of a great analogy: Why athletes are like great entrepreneurs.

Years of experience as an entrepreneur and an athlete have taught me that entrepreneurs are similar in at least six ways:

1.  Training and Muscle Memory: Just as an athlete repeats the same motion in order to perform action without thought and develop instinctive reactions, an entrepreneur must find that repeatable sales process in order to grow a business. What benefits does a client receive from the product or service that they can’t do without? Need sells products and services, not just wants. An entrepreneur’s training comes from talking to potential customers and bootstrapping.

2.  Laser-Like Focus: You have to practice hard to play hard, and practice often. Entrepreneurs run alpha tests, and then beta tests over and over until they get it right. Such practice will make them ready for the ring. Focus on that one big problem that needs to be solved. Everything else is gravy. Pete Carroll, now coach of the Seattle Seahawks tells his athletes not to play the game of their lives, but rather to play the game the way they have been training to play.

3.  Disciplined Behavior: Athletes get up early to workout, eat right, and sacrifice time elsewhere. This active discipline is comparable to spending countless hours editing the website, making the time to listen to customers, or giving up weekends. Successful entrepreneurs just can’t turn it off.

4.  Vision and Focus: Vision is long term and focus is in the moment.  Your vision is to win the championship; your focus is on one punch at a time. Entrepreneurs need to have long-term vision and day-to-day focus. How will you build the company over time? How will you meet this week’s payroll?

5.  Finding Your Voice:  Focus + Vision= Your Voice.  Whether you want your voice to be like Iron Mike or Steve Jobs, it takes the same focus, just a different vision.

6.  Teambuilding: It takes a team to be successful in all sports. Even solo sports like boxing or tennis have a team of trainers and promoters to guide the athlete toward the winning pathway. Entrepreneurship is a team sport. It is very difficult to go it alone.

As an entrepreneur, how are you going to train, focus, and be disciplined? How will you build that great team?

The answer? Just like Mike.