Urban Myth: Entrepreneurs are gamblers

The concept of Risk and Return are fundamental to the world of corporate finance.  I want to focus on Risk.  When I was in engineering school I don’t know anyone who liked the probability and statistics paper. The intangibility of Risk made us engineers nervous. Give us something certain that we can measure and grasp.

I suppose Risk’s intangibility leads naturally to its subjectivity. Everyone seems to have their own unique Risk appetite. What one person perceives as a gamble another calls a “dead cert.” It’s what makes Risk so fascinating.

There are a number of reasons why Risk assessments can be so diverse. The relative amount of knowledge, experience and expertise can vary hugely between investors. Anyone who has the requisite critical mass of knowledge experience and expertise will in general perceive much less risk than someone who is aware that they are navigating uncharted waters.  Someone who has $1m will look at a $100 bet differently than one who only has $1,000.

In business, I believe that the entrepreneur comes in two shapes: the Pioneer and Self-Employed. Pioneers have a germ of an idea that inspires excitement and passion. They must be strong willed, single-minded and resilient as they evangelise their product or service in the face of a skeptical audience. The Self-Employed usually gained their experience and expertise under the employment of others and either own their own businesses because they became frustrated with their employer or because circumstances such as a global financial crisis have dictated it. Their product or service is usually proven and largely a carbon copy of what they were doing in their previous employment.

Clearly the challenge faced by Pioneers and the Self-Employed have different Risks but nonetheless both groups have to face up to them. All the successful business people that I have met recognise and accept that they faced risks and do all they could to mitigate them, avoid them if they can or minimise them. Where they lacked knowledge they did all in their power to fill the gap. Where they lacked expertise, they sought advice and take it. Where a lack of cash might result in cutting too many corners, they brought in investors.

All business people face risk, not just new ventures. Successful business people don’t gamble. They improvise, adapt and overcome them. That is, they bring the level of risk down to a manageable level.  Unlike school there is no reward for “trying hard.”

What are the risks facing you?  What are you doing to overcome them?

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