What are the specific risks to entrepreneurial capitalism?

Discussion About Managing Entrepreneurial Risks

It is important to understand the construct of risk and uncertainty. Businesses have always faced risks. As we discussed in another Article, recent events around the world in the last few years have provided dramatic evidence that, in today’s business world, risk is now a reality.

How Do We Keep From Failing?
Entrepreneurship, risk, and uncertainty are long-time bedfellows, and they push the entrepreneur to the limit. Peter Bernstein, in Against the Gods, the Remarkable Story of Risk, describes that the modern concepts of risk dates back more than 800 years with the early principles of gambling. According to Bernstein, “The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk.”

The period of global exploration and trade during the 1500s and 1600s transformed these principles into the creation of wealth and “the inevitable result was capitalism, the epitome of risk-taking.” Bernstein writes, “You do not plan to ship goods across the ocean, or to assemble merchandise for sale, or to borrow money without first trying to determine what the future may hold in store.” In fact, when the Revolutionary War broke out, the Americans had to create their insurance industry from scratch and underwrite maritime business and life insurance policies for sea captains.

Uncertainty means that decision-makers do not have sufficient information about environmental factors, which increases the risk of failure. For this book we define risk as the degree of certainty or uncertainty as to the realization of expected future financial returns in a business venture.

Risks Specific to Entrepreneurial Capitalism
Risk-taking is essential to capitalism. Without risk the free enterprise system cannot function. Not all risks and challenges can be anticipated, but once identified, they can be managed by lead entrepreneurs, executives, and boards working together. We all have some kind of belief that entrepreneurship is risky, but the facts are startling. Estimates from the SBA’s database suggest that of the 850,000 new businesses started each year, about 60 percent fail in the first six years and more than 70 percent fail in the first eight years. Risks that are specific to entrepreneurial capitalism are listed here.

Economic Risk
How is the business world today? What is the window of opportunity for this venture? Includes geopolitical threats, economic cycles, interest rates, and governmental regulations.

People Risk
What about the venture team? How did they come together? Have they worked together before? Can they make through the growth stage, or will there be too many cooks in the kitchen?

Market Risk
How are the dynamics of this industry sector? Is there going to be room for growth in this market? What about the risks of other competitors?

Technical Risk
Does the product work? What about some technology coming along in the future that will make this product/technology worthless like a buggy whip?

Strategic Risk
Is there a sustainable competitive advantage? Includes sharing the risk with strategic alliances and finding the right operations strategy with a viable business model.

Financial Risk
Can this venture or activity get funded now? What about later rounds of financing, when growth kicks in and it needs fed with cash?

Personal Risk
Can the lead entrepreneurs truly commit? There are many sacrifices, as other priorities in life, like family, friends, and vacations that will have to come second.

Unwinding this Knot of Uncertainty
Left unmanaged, these risks get tightly wound into a knot. When it is wound so tight, management skills, expert advice, and even hope are passed up as humans go into the survival mode. In fact, the human organism can tolerate anything except uncertainty, which causes so much stress that people are no longer capable of thinking in a cognitive, creative manner. They focus on survival. What makes this “knot of uncertainty” so difficult to deal with is that all the entrepreneurial risks interact with each other.

For surviving the “deep, dark canyons of uncertainty” we again draw on Bernstein. He tells us that the essence of risk management lies in maximizing those areas where we have some control over the outcome while minimizing those areas where we have absolutely no control.

Unwinding this knot, one risk at a time, starts with keeping your blood cool in the heat of the battle, or as military experts say, having a sang froid. You need this cool temperament and a clear head to separate the “controllables” from the “uncontrollables.” Controllables are the elements that management can control like the cash burn rate, the activities of the venture itself, personnel, finance, and production. The uncontrollable forces are external forces over which your venture team has no direct control, although sometimes it can exert influence.

Becoming Risk Technicians
William J. McDonough, president of the Federal Reserve Bank of New York, says that taking calculated risks is part of any business venture. Each venture needs to have in place the systems and management processes necessary not only to identify the risks associated with the business activities, but also to effectively measure, monitor, and control them.

Identifying and being able to openly discuss the risks inherent in your venture is very key. It demonstrates your leadership and management skills. It increases the credibility of you and your venture with investors and strategic partners. It creates confidence that quickly clears open the channels of communication.

By reading the content on our Web site and working hard to follow the strategies and concepts outlined herein, you will become expert risk technicians: experts at identifying risks, knowing how to manage around risks, and becoming comfortable in high-risk environments. Developing an effective strategy for dealing with risk and uncertainty sets apart the winners from those lost at sea.

The strategy for dealing with risk and uncertainty includes three key components:

– The business plan is the heading that provides guidance even in the roughest seas.

– Entrepreneurial knowledge is knowing where the rocks (or risks) are at sea.

– Entrepreneurial management is the skill of steering from the rocks.

Venturing into Stormy Seas
Historically, ventures that launched during economic downturns had difficulty in raising money and had to grow in a step-by-step approach. Tim Draper, a partner at Draper Fisher Jurvetson, believes that entrepreneurs launching today must find ways to build revenue and be more capital-efficient than in the past. Ventures that are watertight in stormy seas will last longer and become market leaders. Examples of great companies that started in economic downturns are Hewlett Packard, Sun Microsystems, Dell Computer, Genentech, Palm Computing, Intuit, and even Starbucks. They did not go out and raise $50 million in venture capital. They became huge, successful companies because they watched money carefully.

Even large corporations must batten down the hatches and watch each dollar more carefully. According to T. J. Rogers, founder of Cypress Semiconductors, “We’ve had two recessions in seventeen years. They were tough times, but I think I’m a better manager for it.”

Don Valentine, founder of Sequoia Capital, has been around since 1972 and helped launch Apple Computer, LSI Logic, Oracle, and Cisco Systems in economic downturns. He says, “I think a retrospective from 2010 will show that 2001 was the beginning of (a new) golden era. Some of the great companies of all time have been started in prior recessions, and my forecast is they will be started (again) in this recession.”

SOURCE: Roadmap To Entrepreneurial Success