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.