Entrepreneurs and Risk

Posted by: John Tozzi on August 31, 2009

How do entrepreneurs feel about risk? I’ve been thinking about this a bit in light of recent evidence that suggests people who work for themselves feel more secure than those whose livelihood depends on the whims of one employer.

A few weeks ago I spoke with Jason Fried, the 35-year-old co-founder of 37 Signals, who had this advice for aspiring entrepreneurs: “Start a business on the side. Keep your day job.” Fried sounded frustrated with the caricature of entrepreneurs as big risk takers who throw caution to the wind to pursue business ideas. “I think great entrepreneurs don’t really take much risk,” he says. Instead, he advocates thinking long-term, developing a business gradually, and only quitting to do it full-time when it seems like a safe bet — i.e., customers are paying for your product or service.

Maybe it’s useful to distinguish here between entrepreneurs and the self-employed, that is, between founders who want to grow companies and freelancers who simply want to make their income working for themselves. Each involves a certain degree of risk, but those who want to build growth businesses are riskier because it takes more investment. Growth businesses also have a greater potential return than someone essentially earning a personal income as a freelancer.

But I think the way entrepreneurs think about risk is different from, say, the way Wall Street thinks about risk. For a Wall Street trader, risk is a financial calculation only, to be balanced against potential return. (In recent years, it’s seemed closer to gambling sometimes.) I think entrepreneurial risk has much less to do with money and more to do with ideas and execution. Will the entrepreneur’s idea succeed in the marketplace? Can she successfully recognize an opportunity and build a business to take advantage of it? There is financial risk involved, of course, but I don’t think financial rewards are the main motivator for most entrepreneurs.

So I’m curious — how do you approach risk as an entrepreneur? Do you feel running your business is less risky than working for someone else? What returns do you seek — financial or otherwise — in exchange for the risk of running your own business?

Reader Comments

Steve Woodruff

September 1, 2009 10:33 AM

I definitely feel more secure as a solo entrepreneur, than being subject to the whims of some other entity. If I build my network and take care of my clients, it's the best job security there is.

Jonathan Fields

September 1, 2009 10:55 AM

I think it also comes down to how you choose to scale. Some models require substantial investment of money and ramping up of overhead and complexity. More and more, though, freelancers and small businesses are discovering ways to scale that reduces risk and complexity by commoditizing and distributing knowledge.

Examples include copywriters and marketers who develop niche specific campaigns, test them, then license their use, instead of selling it one time. Or designers who create and distribute DIY branding information for small businesses.

SO, I agree, the massive scale homeruns tend to require more cowboy-oriented risk, but increasingly, most small business people can scale to a very satisfying level without the exposure and complexity that was required just a few years ago.

Barbara Winter

September 1, 2009 12:07 PM

I once got a call from an investment broker. When I told him my primary investment was my own business, he sounded shocked and said, "Isn't that risky?" I replied, "Not as risky as giving my money to a stranger over the phone." What others perceive as risk doesn't feel like it to people who understand creative problem-solving and are flexible and willing to change as situations warrant. And small businesses can adjust more quickly than big dinosaur organizations.

Brian Armstrong

September 1, 2009 01:24 PM

I'd say I definitely have less security, but for me what makes it worth it is (1) freedom, meaning being in control of my own destiny, not having a boss, working whenever and wherever I want, for example I'm living in Buenos Aires right now and (2) potential for much more security in the long term, because if you want to build huge amounts of wealth you have to build/own a business.
Brian

Bonnie

September 1, 2009 02:50 PM

I agree with the article, in that I kept my day job for many years, running my business part time. Only when it seemed feasible for me to leave my job - actually when one of those "whims" hit my boss! did I leave. The banks still consider me a risk, but I've built the business up to a point that I don't need banks to operate. And the freedom to make my own sound decisions is amazing. Is the money?? no I don't think so. Not reporting to someone that has NO vision is a big part of it for me.

Bill Attinger

September 2, 2009 01:14 AM

I was a Wall Streeter in the early '90s and an entrepreneur and startup guy after that and ever since then. Recently a "fast talking startup evangelist" (trying to differentiate b/w this and a true entrepreneur) tried to convince me that entrepreneurs didn't care about risk. He confused passion and tenacity with a disregard for risk. I kindly corrected him. Entrepreneurs do care about risk and think about it at least indirectly more than most people. We have chosen to manage a greater level of risk in our professional lives much like a short trader or currency trader manages a greater level of risk than, say, a trustee with a portfolio of munis. Most of us entrepreneurs are here to change the world. Financial gain is likely a great side effect for achieving our goals which will allow us to independently fund more ways to make an impact. Entrepreneurs have to manage a greater amount of risk from a greater number of angles than if we spent a career in a "cube farm", but there is still risk in the dependency of a corporate career. A banker usually deals in a more linear risk of financial return through betting on which entrepreneurs manage their business risks better. We entrepreneurs are on the front line - not betting on the banker (unless we are looking for one of them to fund our venture!) - but betting on our idea, the team we assemble, the approach we take in the marketplace, the rationality or irrationality of the marketplace, and ultimately, ourselves. So, maybe through all of my rambling, it comes down to that simple condensation: entrepreneurs bet on themselves more completely than any other "professional being", and we do it with a daily renewal and reaffirmation of self confidence - coupled with a re-tuning of our risk assessment - to keep us on track to make a difference.

John@jvanwyk.com

September 2, 2009 07:59 AM

I have to agree with the point that was made regarding keeping your day job while getting your business going. Don't forget that whatever you learn while starting the business "on the side" also transfers to you knowledge in your present job. I think that successful people, not just entrepreneurs realize that you don't work for a paycheck, but for yourself and your passion. Any knowledge that you acquire from the en devours you take on will always be with you in some way. That's what breads confidence and in turn security to know that you can handle almost anything thrown your way. Barbara Winter made a great point in her comment about her primary investment. You have to take care of you and your family first, no one else will.

John@jvanwyk.com

Alain Theriault- The startup coach

September 2, 2009 12:42 PM

The "natural" entrepreneur (compared to the accidental one) has a perception of risk quite different from the average individual and even top-managers. They also are more impulsive. Having both theses characteristics make it hard to work in a corporate setting. Now, choosing which venture to pursue is an individual decision based on their own ability to affect the outcome. Which starts from you and not the environment. In other words, it's not the opportunity, it's the one YOU can create.

Adrian Rivers

September 2, 2009 05:17 PM

I agree that the stereotype of entrepreneur as inveterate risk-taker is just that - a stereotype. Successful serial entrepreneurs are clearly adept at risk assessment and risk management. My concern lies with the risk-junky who gets lucky on a gamble and starts to build a business - now s/he is playing high stakes with the lives of other people (their employees) who will not get an equal share if the risk pays off but who will pay the full cost of failure.

Michael Ferreira

September 3, 2009 10:02 AM

Thanks to the current and continuing deep recession, many people become entrepreneurs, not by choice but by necessity. I reference the article titled, "Plan B: Starting a Business", written by Mickey Meece and published in the August 23, 2009 edition of the New York Times.
The reluctant entrepreneur does not understand or comprehend risk. They are following a passion or leveraging their experience and knowledge out of necessity. Had this recession not occurred, they would not be entrepreneurs.
As a result, they assume risks almost recklessly as they try to establish their business to return to a lifestyle they previous enjoyed.
With jobless claims continuing to be stubbornly high, more people are being forced to start a business. Some will be successful, but statistics show that most will fail within the first two years.
A new stereotype is being created since the face of the entrepreneur is rapidly changing. What is risk-taking for someone with nothing to lose?

Carol Cross

September 3, 2009 01:53 PM

I think we need an explanation here that applies to FRANCHISING and self-employment.

It is the FranchiSOR who is the entrepreneur and the franchisee is merely a resource for the franchisor that enables the franchisor to grow quickly, and to greatly reduce the risk and expense of building the physical chain system that produce the gross sales.

When franchisees fail, it is not necessarily a failure for the franchisor (read about "churning) and current regulatory policy encourages franchisors because it is the systems and the units within the systems who thrive that do stimulate the economy and provide profits for the special interests.

Michael Ferreira says "What is risk-taking for someone with nothing to lose?" But, franchisees cannot get loans unless they have collateral to secure the loan and franchisees sometimes put everything they own at risk because of the "personal guarantees" required to buy a franchise that they think offers security and a job.

John Martinka

September 3, 2009 08:02 PM

I work with business buyers and my clients understand the risk issue. It's why they buy an established (mature, profitable) business. It gives them more security than a start-up. This could also be called risk management as every business has red flags, the buyer sees those red flags before buying the business and can weigh them against their skills and experience.

When I ask a group why they want to own a business the reasons always center around control, flexibility, ability to earn more, independence and to reap the rewards of their hard work. This can also be interpreted as security. As Ms. Winter mentioned, when you are in control you feel your risk is lower.

There is security in knowing your efforts are the major catalyst to your success. And, you are the boss who determines the direction and strategy.

Finally, as mentioned above, there are a lot of people forced into thinking of entrepreneurship who really don't want that path. They often choose the easy route of independent contracting until a new job comes along. Those who put down a sizable down payment to buy a business have transcended beyond that and are serious about wanting to be in business for themselves as they don't want to be under the thumb of a large company.

Max Rudolph

September 4, 2009 09:43 AM

There are many risk issues to consider when deciding to go out on your own. If you are a professional, as I am, it’s hard to develop a separate business without infringing on your current job. Your employer can say that any work product by an exempt employee belongs to them. So much for getting rich by discovering the cure for the common cold at home. Other reasons to wait include benefits such as health care and vacations. Try taking 2 weeks in the mountains without checking email. If you are also the marketing arm of your firm (and most of us double up or more) you can’t do it. Of course there are many great reasons to work for yourself. I know my blood pressure dropped materially once I was responsible for working to help clients make better decisions and did not have to play political football. The schedule flexibility allows me to spend more time with my kids as they grow up, which all goes into my personal set of risk considerations. As an actuary focusing on enterprise risk management, I think a lot about different time horizons, both for my clients and for my business. A decision might seem correct over the next few months, but a longer term horizon should also be considered. Having one big client versus a few smaller projects fall in this category. Repeat business is the key to success for most businesses, which means customer service should be at the top on the list. Risks should also be considered holistically, with emerging risks and combinations of interrelated risks and events considered in advance. An example in today’s environment would be a more virulent form of pandemic influenza. If you are making and shipping a product, will the supply chain get you the ingredients you need? Will you be able to transport your finished product? Will employees come to work? What backup plans have you made? Use these answers to help you succeed under other stress scenarios, such as when the weather or other natural disaster shuts you down for a week. Scenario planning can help you to succeed during challenging times like these without taking up lots of time.

Entrepreneurs have a different set of risks to consider, but I know from personal experience that the returns you earn from those risks are well worth the effort.

Carol Cross

September 4, 2009 05:03 PM

It would seem from the dissertation of "risks" for entrepreneurs as provided in the above comments that franchisor entrepreneurs are especially subsidized and encouraged by ineffective regulation of franchising that treats the sale of franchises differently under the Uniform Commercial Code.

Some retail franchises involve the investment of hundreds of thousands of dollars and a commitment of ten years under hard and unbargained contracts and yet, the franchisors, the sellers of the franchises, who always profit, appear to have no duty to disclose unit historical financial statistics, the most importantant risk factor, to new buyers of their franchise.

How is this justified? Of course, it is the franchisor who is the entrepreneur and who is subsidized by government regulatory policy, and the franchisee is merely a resource for the franchisor in success, and in failure, as well, when failed units remain in the service of the franchisor under new ownership.

The franchisor has greatly reduced his risk as an entrepreneur because he doesn't have to disclose the risk to the franchisee before the contract is signed. The "startup" franchisor and the mature franchisors are subsidized by the ineffective regulation of franchising.

Obviously, this "entrepreneurial" model of franchising has grown in our economy and throughout the world because it does permit franchisors to perpetuate themselves and to saturate markets to compete using the cheap labor and the cheap venture capital of hopeful franchisees.

Perhaps this is why franchises are falsely marketed as being more successful than independent startups because the franchisor does have a better chance of survival?

Jason Blumer - the THRIVEal blog

September 9, 2009 10:59 PM

I've always been more secure working for myself, even in times of tight cash flow, than someone else.

I feel safer relying on my abilities than the abilities of someone I can't control.

And though I don't always do everything right, I still maintain most of the control over how my firm progresses.

http://THRIVEal.com

Jeff Turner- USA Tax and Accounting

September 11, 2009 09:45 AM

Interesting topic. One that I have given a great deal of thought to over the past 2 years as I transitioned out of corporate America and into the ranks of the self-employed. I like the distinction between "entrepreneurs" and the "self-employed" because the business models are different. However, there is still risk no matter what you call it. Personal resources and reputation are all at risk when they are concentrated in one business or one venture. On the other hand, a regular job with a steady paycheck can also be at risk if you work in a very cyclical or unstable industry or company. The risk of losing a job is just as real as the risk of losing a company. I think the key point to consider is concentration risk. Multiple, diversified income streams will always carry less risk than having only one source of income, regardless of whether you are an entrepreneur or an employee. That's why the small, successful store owner wants to open another store, or why the entrepreneur with one hit product immediate searches for another, or why 2 spouses that work is less risky than one. You may say greed plays a role, and that would be true. But the fact remains: diversification reduces risk.

Malcolm Evans

September 18, 2009 11:36 AM

I'm increasingly beginning to think that the whole foundation of "entrepreneurship" on the paradigm of "risk" is sooo-last decade and, also increasingly, that "entrepreneur" is itself a term that is losing its analytical power and impact. I have been involved with funding and, latterly, running, start-up business for almost 20 years. Risk is a dimension; value-creation is my mission. Entrepreneurship is not really my framework; productive community is. I often wonder what the academic and media commentators think goes on within early stage companies. Read more about the end of entrepreneurship as a useful mindset at:
http://www.businesszone.co.uk/blogs/malcolmevans/diary-start/entrepreneurship-dead-long-live-community

Malcolm Evans
The Cutureship Practice
http://www.cultureship.com

Molly Connolly

September 18, 2009 11:56 AM

I’m not sure if “high risk tolerance” is the right measure of this entrepreneurs mentality. For me, the reward of working on my own is I’m not afraid to fail. A corporate setting the stakes of a failed idea or implementation were so much higher because if you tried something new and it didn’t work you could lose your job. On my own, if something doesn’t work out, I just try something else. I always figure my worst case scenario if all fails is I have to get a "real job".

Dave

September 18, 2009 12:07 PM

Reading this article makes me think my partner and I are doing it right. We haven't quit our day jobs and are still figuring out how to run our busines..

Mark

September 18, 2009 12:39 PM

I found it interesting that every entrepreneur/self-employee in this discussion successfully works in some variation of: only the hours wanted, from an exotic land, in a home office surrounded by their kids, with no boss.

Really? Considering we all know the success rate of any business from restaurants to VC funded start-ups, to individual ventures are much lower than the failures.

Jennyjen4000

September 18, 2009 03:05 PM

When I read the title of the article I thought shoot, I'm not really an entrepreneur despite that being my MBA concentration. I've been questioning it since I do think long term, am very risk conscious, cannot fathom the typical VC debt and return scheme, and still work in a corporation, constantly thinking of the "better way". This was a nice reminder to stay on track, keep pushing, and at the least....I'll be equipped for a lifestyle business to support my retirement when my 401K totally evaporates and there's no social security left. So much energy has been wasted on the "other" model, not that it shouldn't exist, but I'm glad to see it put in it's place...looking forward to more people starting small, and growing based on the value....I think we'll all have more fun with it.

Carol Cross

September 18, 2009 03:07 PM

Yes! Interesting that those small entrepreneurs who commented above in this discussion "successfully works in some variiation of only the hours wanted, from an exotic land, in a home office surrounded by their kids, with no boss."

No comments from the thousands of entrepreneurial franchisors we read about in Entrepreneur Magazine who dominate the small retail sector in our econmomy and pass on the risk to their franchisees.

No comments from the franchisees, either, who must be too busy working in their franchised businesses, to provide profits for their franchisors, to make comment.

No comments from those 50% of those small business startups who fail out of business sometime in the first five years, either!

We know where the franchisor entrepreneurs get their cheap "venture" capital and cheap labor -- from their franchisees! But where do the franchisor entrepreneurs get their venture capital to franchise and grow their businesses?

Is VC available to franchisors because of their reduced risk of growing a chain and the subsidy indirectly given to franchisors through government policy and SBA loans?

Home equity loans and loans on 401's have also, unfortunately, been used to finance franchised retail business units for franchisees but, of course, the franchisor entrepreneur, himself, would not generally qualify for a government guaranteed loan from the SBA.

Franchisors are encouraged to franchise their businesses under current law that transfers most of the risk of growing a chain store operation to the franchisees.

See: http://thegreatfranchisingrobbery.blogspot.com/

whatever

September 29, 2009 10:32 AM

A lot of self aggrandizing babble from the whole lot of you. Get back to your amazing, liberating, powerful businesses. But before you do, clean the cat's litterbox and then take that client call in your pajamas with Ellen on mute.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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