In my experience…entrepreneurship is an exercise in risk management
By: Brett Simpson
Tags: Risk, Risk Management, Entrepreneurship, Startup, Entrepreneur

We all know entrepreneurs…and some of us are entrepreneurs. I hear many words used to describe them.

…Visionary

…Innovator

…Creator

…Expert

All true, accurate and could be applicable to non-entrepreneurs as well. The descriptor (it’s actually two words) that intrigues me most about entrepreneurs though is ‘risk manager’. This doesn’t mean non-entrepreneurs aren’t risk managers, rather that it’s a core characteristic (required?) of most entrepreneurs. It also doesn’t mean that all entrepreneurs are good risk managers all the time.

In my experience, entrepreneurs are not completely risk-averse, and their tolerance is generally calculated and informed given the various kinds of risk they encounter. These risks include, in no particular order and somewhat intertwined, Compensation Risk, Lifestyle Risk, Team Risk, Time Risk, Product / Service Risk and Funding Risk.

Compensation Risk

Simply put, what is the minimum amount of money you need to live on to survive…and how soon will your venture be able to provide that to you? Said differently, how much money can you afford not to make (i.e. the opportunity cost of a ‘regular job’) to pursue this passion? When I talk to entrepreneurs about this topic, I ask them if their minimum will be met if revenue is half and expenses are double what they estimate.

Lifestyle Risk

Are you willing to live and breathe your new venture to the exclusion of other things in your life…not forever, hopefully, but likely for some period of time? Some ventures are called lifestyle businesses because they inherently allow the entrepreneur to ‘have a life’. Many ventures are not lifestyle businesses and require more effort than seems humanly possible. Think about your willingness to make this sacrifice and how you’ll do it.

Team Risk

If you have a team…who’s on the team, why, and do they have the same level of risk expectations and tolerance as you do, or at least as much as is needed to fulfill their responsibilities? Teams change, sometimes drastically, and because of that it’s important the team on the ground at any given time is always able to move forward and manage toward successful outcomes. Think about how you’ll enable continuity when resource changes occur.

Time Risk

Time can be a friend or an enemy to an entrepreneur, and there is never enough of it. This includes time spent on the venture (see the Lifestyle Risk section) but also development-time, time-to-funding and time-to-market. Even if the product or service is amazing the timing could be wrong…market isn’t ready for it, market is already saturated with competitors, it’s a race to market. There is also risk when examining the trade-off between ‘time’ and ‘quality’ in product / service development.

Product / Service Risk

Are you building a better mousetrap or a brand-new trap for something that’s never been trapped before? Chances are you aren’t the first person to have your idea. However, if you are the first one or if you have a better mouse trap, are you ready to run the gauntlet of constant changes and tweaks? Iterative product / service development is important, but it can also lead to a lack of forward progress if “good enough” isn’t defined and enforced.

Funding Risk

How much funding is needed to launch and sustain your venture? Where will that funding come from? When and how often? How much will the funding ‘cost’? There is a lot of guessing (and hoping) that happens around funding, which is why it’s a risk. Obtaining funding doesn’t guarantee success, but lack of funding is one of the quickest ways a venture can die. Also, make sure your investors are prepared for multiple investment rounds…you’ll need more money, sooner than you think.

Each one of these risks could be an article in and of itself. Taken together they make entrepreneurship seem daunting and fraught with peril (i.e. risk), which is the point. It’s unlikely a person can ever be fully prepared for the experience of being an entrepreneur and my observation is that while you can’t avoid risk in entrepreneurship, there are ways to mitigate it.

These are just a few of the risks entrepreneurs face. Have you faced others?

Special thanks to Darcy Howe, whose passion for entrepreneurship is contagious and inspirational, and to Jeff Glasco, because I want to be a part of anything this guy does.