21 Jul 2015 18:23 IST

Calculated risk-taking defines entrepreneurs

Rewards may outweigh them, but understanding and accepting the risks involved are essential

Management guru Peter Drucker once lamented: “Whenever you see a successful business, someone once made a courageous decision.” Truer words haven’t been said. Risk-taking and entrepreneurship are almost synonymous. An entrepreneur puts his career, personal finances, health, and relationships at stake. When I started off as an entrepreneur early in my career, I had to forego the luxury of a comfortable and stable corporate life. This is a difficult decision to make, and there is always a trade off to make between starting early in life with little/no experience but with a lot of enthusiasm and a life not yet used to the luxuries and trappings of corporate life vs gaining experience and building networks at others’ expense but also probably a little hardened in outlook without the flexibility that youth provides.

Needless to state my parents were aghast when I first took the decision to turn entrepreneur and short of making me pack my bags and head back to a job, they did try all else. Half-baked attempts at entrepreneurship or folks who turn to entrepreneurship as a fallback are less likely to succeed. But that does not mean one has to be rash. Taking calculated risks is what defines a good entrepreneur.

Compelling motivation

“For wannabe entrepreneurs, wanting something is not enough. You must hunger for it. Your motivation must be absolutely compelling in order to overcome the obstacles that will invariably come your way”— Les Brown.

Some of the risks that every budding entrepreneur will need to face:

1. Career risk

Before you venture into the world of business ownership, you’ll first have to say goodbye to your current job, and in some cases, your career. For most starting entrepreneurs, the choice is a risk that one must face. Personal incomes will turn uncertain especially till one gets funded. However today there are a number of sources of funding if the idea is good and big enough and one moves ahead of the curve.

2. Capital risk

Most entrepreneurs will have to invest upfront from their own savings and this can be supplemented along the way with external funding of many kinds – angel funding, loans or crowd funding. This will mean dipping into one’s own resources; along with an uncertain income flow it increases the risk of an entrepreneurial career.

3. Financial risk

For a start up managing finances is likely to take up a lot of time and energy. Revenues may be much smaller than outflows and this needs to be managed well. Undercapitalisation of a business is as much or more of a risk than overcapitalisation.

4. Market risk

No matter how much research you do or how many tests you complete, you’ll never be able to estimate the market reaction until you get your feet wet. I know of no product that has been popular from the word Go. Normally quite a few iterations are required before you hit the right recipe for success. In the interim there will be pressure on resources – both financial and human resources.

5. Risk of intellectual capital

Many times a start up has to ride a fine balance between getting excellent human resources vs the financial means to pay for and retain talent. This requires that the entrepreneur is also an excellent leader who is able to motivate people with his vision for the business as also finding innovative means by which to reward such talent while conserving the cash resources of the business. The risk of good people leaving is one of the biggest risks that start-ups face.

Rewards vs risks

The rewards of entrepreneurship often outweigh these personal risks, but understanding and accepting these risks are extremely important. The motivation to turn an entrepreneur and focus on translating the idea into reality must be so strong that the inherent risks should not deter you from pursuing entrepreneurship. Instead, see them for what they are: necessary obstacles on a greater path. There’s no way to avoid the risks you’ll face as an entrepreneur, but by recognising them, you can prepare for and mitigate them.

However there is an important distinction between risk-taking and recklessness. This is an issue that needs to be well understood by all potential entrepreneurs. A good entrepreneur looks at the problems on hand and learns

(i) To prioritise challenges

(ii) To weigh payoffs on success and failure

(iii) To decide on resources required and what is available

(iv) To assess possible future scenarios of the business based on success and failure

Critical challenges

It is important to ensure that those critical challenges/problems are tackled first where there is a more than proportionate chance of success and which can transform the business. Finally taking the right call on this crucial issue is what defines a good entrepreneur.

Here are a few pointers on risk taking and entrepreneurship based on my experience

(i) Every big problem is a big opportunity and, if there is no problem, there is no scope for innovating something new. For this one has to spot a trend and then act on it.

(ii) Often, a shift in cultural or economic trends will create new entrepreneurial opportunities. The challenge is to recognise the shift early, and then act on it, despite the risk. This enables a “first mover” competitive advantage. If one can’t be a first mover then at least try and differentiate and become a “first shaker”. To quote an example Whatsapp was not the first text messaging service but the simplicity and its reliance on wi-fi transformed the market so much so that it was acquired by the “market mover” Facebook for $19 billion.

(iii) Take the risk. Don’t wait to de-risk yourself so much that the payoffs, if and when you do succeed, is inconsequential. Don’t mind failing, but fail fast, learn from it and move on with better insights. It is better to fail fast and small and learn from it rather than have success initially and get complacent and deal with a huge failure later on. Let not these early failures deter you, but learn from them and move on.

(iv) Find a niche that is underserved and where you feel there is something that customers need that is currently not fulfilled. Break conventional wisdom and try new things to serve that unmet need. Most entrepreneurs succeed because they move away from established formulas and ways of thinking. Challenging convention can open the door to competitive advantage.

(v) Be frugal in spending money and get the maximum bang for the buck.

(vi) Do not stop believing in yourself, despite the failures and criticisms. Persistence and resiliency lead to success. I am very fond of saying that it took me 15 years to be an overnight success. But it pays to learn as one goes along and re-invent oneself.

(vii) Trust your instincts and your gut. New research confirms that intuition is a real form of knowledge. It’s a skill you can develop and strengthen and one that comes from experience. Rational analysis is no substitute.

(viii) Every start-up goes through tough times. Entrepreneurship is not easy and everyone knows that it is tough. Almost all entrepreneurs go through bad times. It is the resilience and persistence that sees them through in almost all cases.

Robert F. Kennedy put it aptly: “Only those who dare to fail greatly can ever achieve greatly.”