Tuesday, October 2, 2012

Entrepreneurship Is All About Taking Smart Risks

Most entrepreneurs think that risk is just an “occupational hazard” that can be minimized or eliminated by a smart businessman. That way of thinking is simplistic and wrong. In reality, some risks are good and should be embraced for growth and a competitive edge, while others are bad and should be avoided completely.

Traditional risk management focuses only on bad risks, and seeks to contain losses. But if you want growth and sustainability, you need to create smart risks, which means intentionally taking a risk to grow your business or gain competitive advantage.

In fact, entrepreneurship is all about taking calculated risks, while minimizing non-calculated risks. Here are some simple examples of “smart” calculated risks that you should be working on:

  1. Deliver an innovative solution to a painful customer problem. This can be high risk if your solution doesn’t work, or your price is more painful than the problem. A bad risk is assuming that you because you like the solution, everyone will buy it, or that you can build an existing solution cheaper than anyone else.

  2. Plan to replace your product with a better and cheaper one. Probably more companies fail by avoiding this strategic risk than any other. If the current product is making money, it seems like a bad risk to obsolete it. Yet, new technology can quickly blindside you, and market dynamics change, plus you need to broaden your opportunity.

  3. Build a dynamic product line, rather than a single product. Every new product you add stretches your ability to deliver winning function and quality. Yet a great initial product, with no follow-on, will not keep you ahead of competitors. Take the strategic risk.

  4. Implement a new business model. Software as a service (SaaS) has now pretty much replaced the old licensing model, but offering it was a strategic risk for SalesForce.com. Proactively implementing new business models, like subscriptions and “freemium” pricing, are good risks, while linearly lowering old product prices is a bad risk.

  5. Partner with a competitor. Use “coopetition” for cost sharing, economies of scale, and open access to new markets. Once you have established your credibility and value, a strategic partnership may lead to other business relationships or a funding source.

  6. Plan to spend money on marketing. It’s a bad risk to count only on word-of-mouth and viral social network buzz for marketing, as I see in many business plans today. These days, you have to spend money to make money. Of course there is work involved to find the right media, and balance the investment against the return.

  7. Build your team from the best and brightest. Good people are expensive, and they are hard to find, which adds risk to your startup, but it’s a strategic risk. Lowering the risk by hiring the cheapest, or counting on family members, is a bad risk.

  8. Count on less funding rather than more. It’s a well-known oxymoron that startups which are over-funded to reduce risk fail more often than under-funded ones. Strategically, the more you can do for less, the stronger you grow. It’s a bad risk to solve problems with money.

  9. Be aggressive in your forecasts. Every investor has heard from the “conservative” founder who reduces his forecast to lower the risk. These don’t get funded, or they under-perform anyway. Forecasts should be strategic, based on the opportunity and pain level.

  10. Lead rather than follow. In the old days, the leaders always caught the arrows, so following was less risky. Entrepreneurs who try to reduce risk by following winners, like building another Facebook or another Google, will find that they don’t catch arrows or customers.

The challenge with all risks is that they must be proactive, measured, and managed. If not, they automatically become bad risks. How much of your time is spent on containing the bad risks, versus initiating forward-thinking ones? If it’s over 50%, your whole startup is a bad risk.

Marty Zwilling


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