Sunday, 17 May 2009

Entrepreneurs are risk averse

One of the things that I have most often heard being said about entrepreneurs is that they are risk takers. The unsaid implication seems to be that entrepreneurs are dare devils who will willingly defy death because risk is an aphrodisiac for them – they actually seek out and enjoy risk.
Now nothing could be more untrue of most of the entrepreneurs I have known, including yours truly. Every entrepreneur I have known is risk averse. I will go so far as to say that most entrepreneurs are really cautious people – they think a hundred times before making any significant investment.
Entrepreneurs are rational people – they try to minimize risk. What entrepreneurs do is that they seek to understand risk better, they manage risk, they try and mitigate it and then of the various alternative courses of action available they go for that one that carries the least risk.
So how do entrepreneurs go about minimizing their risk when they are starting out? Different people do it different ways.
Some would put aside a nest egg in the bank that would suffice for personal and family expenses for two or three years.
Others would ensure that there is some income coming in independent of the business to run the house with. It could be rental from a property or a spouse’s salary.
Another way to do it would be to do some work that is not the main business but ensures a steady income without being full time – teaching, training, a consulting retainer, periodic short term assignments, writing a newspaper column etc., anything that gets in some small steady income while leaving enough time to pursue the main business.
Many companies pursue one business in the short run in order to get some money for the longer term dream which could be another business. For instance a number of start-ups working on a software product fund the development expenditure by doing software services work early on.
How many entrepreneurs do you know who started their companies from their homes? Who did not take on the overhead of salaried employees early on and instead worked with business associates who got a revenue or a profit share but no fixed salary. Who gave large chunks of equity to early colleagues instead of a salary.
I myself employed most of these methods of reducing risk early on.
The point is that there are hundreds of small ways that start up entrepreneurs reduce their risk. Those that I have enumerated above are only some of them.
I would go so far as to say that entrepreneurs exhibit greater risk averse behavior as compared to employee managers. The reason is simple – it’s the entrepreneur’s own money. It is his life on the line. He has bet his all. He cannot afford to go bust. If he does he will lose everything he has. He will have to start his life all over again. What is more he cannot walk away from his business easily – there are employees and creditors to be paid, and customer commitments to be met. He is personally accountable. Therefore he takes fewer chances.
What I have said is true of many start-up entrepreneurs who do not take external funding immediately. Who try and first bootstrap their companies.
Entrepreneurs who get generous VC funding early on frequently do not display the mind set of frugality that bootstrapping a business instills. They usually don’t understand the value of money and how difficult it is for a business to earn it. Many of the dotcoms that got funded in the last bubble failed precisely because they got too much money too soon. The entrepreneurs did not understand the importance of being tight fisted and minimizing risk. These entrepreneurs ended up taking somewhat injudicious risks – with money they got easily from other people. They were actually not taking a personal risk – they had not bet their own money. Most went back to being professional managers in large companies pretty soon.
But don’t many entrepreneurs choose to leave secure corporate jobs and embrace the uncertainty of entrepreneurship. Isn’t that prime example of embracing risk?
Well, not really. The point is that the lower risk corporate job was not taking the entrepreneur where he wanted to go. He did not want to lead that life. His goals were different. And he believed entrepreneurship would get him there. So once he was clear about his goals he would then go about moving towards them in the manner that minimized his risk.
The point is – entrepreneurs have different goals.

15 comments:

Manu Mahdi said...

Your observations are spot on. The general notion of "entrepreneurs being high risk takers" comes from the "Non-Entrepreneural Circle" who by and large are tied to the risk policies and restrictions imposed by the corporate attire they wear.

I would also like to appreciate your observations on the tigh fisted / bootstrapped approach as I myself are planning to enter into the entrepreneural world, though in a smaller way.

The Big K said...

Sir, why let the secret out? It feels great to be called a 'Risk Taker'. :D

Rahul Burman said...

Its great to read the secret of entrepreneurship from none other then yourself.

My only request to you is to blog a little more often. I eagerly wait for your posts.

Rajesh said...

I so agree with you Sanjeev - having deployed so many of the tactics you have listed and some more. People see the romance of entrepreneurship and not the fact that it takes time for the seed to grow and bear fruit.

Cheers

Rajesh

Web Satan said...

Fantastic Stuff!

sudhir said...

It's great to have this learning lesson from you sir.
I read about your entrepreneurial story in a book by rashmi bansal
i am a part of Entrepreneurial Cell of my college and have the ambition to start my own venture.

MANAN SHAH said...

Interesting and definitely an entirely different point of view. Well I wonder why so many choose to carry on with their miserable lives in blue suits and pretend to be happy!

Anonymous said...

where are your blogs nowadays!!!
long time since we read the next one...

Vasant Prabhu said...

Interesting read, its entrepreneur ism demystified. As somebody who has taken up this cause from the comforts of a cushy corporate job I am able to relate to all your thoughts on this topic. Compliments.

S.Chaudhuri-RS-Naukri-Kol said...

Sir,
Good Afternoon

The other day I was just reading somewhere that only 44% of small businesses stick around for four years or more. One big reason so many go away: Poor risk management.
Thinking about what could go wrong and what should be done to mitigate those risks in a cost-effective manner, surely should help; but by saying that we need to identify the risks.
And for that we need classification of risks by likelihood of occurrence, & consequences. Once we know the severity and likelihood of a given risk, we can answer the question: Does the benefit of mitigating a risk outweigh the cost of doing so?
It shall work out with -
A. Ignorable Risks by Cost effectiveness
B.Nuisance Risks minimize through straightforward changes in behavior.
C.Insurable Risks
Everybody pays a premium to the insurance company, and the insurance company pays claim benefits when one of its customers experiences an insured loss.
D. But the Company Killers are the deadlier once.
I suppose may be-
There's a 90% chance that you've identified a genuine market need;
Your addressable market is as big as you think it is; you can actually implement your innovation; figure out how to sell it for more than it costs you to make it; assembled the right management team to do the job;
Manage to stay one step ahead of the competition; you don't get sued into bankruptcy; won't get buried in regulatory red tape; you don't run out of money; and nothing else goes wrong.
However, the probability of surviving all ten risk factors (making a technical assumption that the ten risk factors are statistically independent of each other) is: 35%
The insight here is that a company that is reasonably good at managing individual risks might have a marginal chance of surviving overall. That's why "reasonably good" isn't 'good enough', risk management must be among the entrepreneur's core competencies and i am confident we as naukri employees are lucky.

So forth now the discussions may go on for Identifying & Mitigating the Company Killers and so on...

Rgds
Saradindu Chaudhuri
RS-Naukri Kolkata

Nagesh.MVS said...

Super Stuff.Ur observation is simply super.

Work From Home

Arvind said...

Great piece , Sanjeev. Will be providing a link to this piece on my blog ! Hope thats ok !

Harshal Kulkarni said...

Excellent article Sir. I would also like to read on HR & Finance issues.

Anonymous said...

good observations

Rashmi said...

Entrepreneurs have a higher need for achievement coupled with greater self belief and confidence than those who choose to stay on with their jobs which they may not be entirely satisfied with.
In that respect, entrepreneurs perhaps believe that a greater risk would be to not take the chance of taking their life and career as high as their self confidence makes them believe is possible. that, I think is the paradox of entrepreneurial atitude to risk.