|
Podcast 1 of 7 from this series
|
Description
This is Professor Deborah Streeter at Cornell University. Welcome to my series on Entrepreneurship and Business Planning. In today’s podcast we’ll look at ways entrepreneurs are effected by their attitudes toward risk. As always, I’ll be including audio clips from interviews I’ve done with entrepreneurs and other business experts. Nine times out of ten when I ask people to define what makes them entrepreneurs, they will say something about risk and their willingness to accept risk. Take Lance Stewart, for example. He’s a scientist turned entrepreneur who is involved in the management of the BioStructures Group at deCODE genetics. In this next clip, Lance describes why he considers himself entrepreneurial. Stewart32_riskI think of myself as a risk taker or...I like to push things sort of natural and some people call that entrepreneurship but I sort of think of it more as sort of just a higher risk tolerance than many other people. I don't get high blood pressure from weird situations. I can just handle risk a little bit better than others, I think. Like Lance, many entrepreneurs feel they are more willing to take risks than other peopl. Ironically, researchers who have studied entrepreneurs have come to different conclusion: that it is not so much the attitude towards risk, but rather the optimism of entrepreneurs that matters. In a 2006 article from the Management Science Journal, professors Brian Wu and Anne Marie Knott, conclude that entrepreneurs are realistic about market risks but tend to be overconfident about their own abilities to overcome such risks. This is confirmed in a comment from Ted Fernandez, founder of Answerthink, a leading business and technology consulting firm. Ted is answering my question about what kept him awake in the first years of founding the new business, after he walked away from a stable, six-figure salary as partner at KPMG. Fernandez04_keptawake Ted, who I interviewed in the early days of his now successful company, which is now very succcessful is admitting that in hindsight, he can see why people thought he was a little crazy -- yet felt very confident he would succeed and in the end he was right. But having confidence doesn’t mean you can skip doing your homework when you start a company. Listen to the comments of Tom Szaky, a Princeton dropout who founded Terracyle, a successful startup that makes organic fertilizer out of waste products. Szaky04_smartRiskA smart risk is something that you as a smart individual are willing to sacrifice for. So as any individual, and assume you are a smart individual you know. You have things that you have to sacrifice to take a risk, or it is not a risk. And a smart risk is something that you didn't just decide you know, after you got drunk and had like a kegger at your friend's and you were just like you know, I am going to do this and jump off the roof. But it something that you carefully thought out. You weighed out all your you know, all the pros and the cons. And you decided you know what? Right now in my life where I am, this decision I think will get me better off. But I am risking losing my present position. That I think is a smart risk. Another dimension of this discussion of risk is simply the willingness of entrepreneurs to tolerate ambiguity. Consider these comments from Rosa Sugrañes, who came from Spain at the age of 21 and started what is now the highly successful chain of businesses called “Iberia Tiles” in Miami: Suranes17_riskAttitudeI am pretty conservative, you know. I like to grow and I am very bold in trying new things and being adaptable but risking a lot of money or doing strange things, no! No! Entrepreneurs are not crazy people. Maybe we have a little touch of creativity or enthusiasm or energy gets mistaken with craziness. No, no! We are not crazy, you know but you need to know how to live with uncertainty, that is very important, that is key! Everything is uncertain, you know, the economy can go down, maybe I need to fire twenty people, it is always uncertain what is going to happen. Your life is not secure, you know, it is not relaxed; you are never relaxed. You have to be always on your toes. But you seem to really like that. Well because you know what, I only know this! I don't know the other thing, you know. I don't know how to compare. I have always had this sensation. I don't know. It is true and I don't know any other thing. Rosa makes the point that dealing with uncertainty eventually just becomes part of what you live with day in and day out as an entrepreneur. But what happens when an entrepreneur fails? Part of the entrepreneur’s attitude to risk and tolerance for ambiguity has to do with how he or she views failure, After graduating from Cornell’s hotel school, Kurt Zitzner started a wings place called Mugzee’s outside of Cleveland. In this next clip Kurt, argues that entrepreneurs just don’t see failure as such a bad thing. Ziztner23_entrepreneurAn entrepreneur basically, I mean, there is a lot of different definitions but I think an entrepreneur is a person that takes risks and that does things that maybe other people don't think that they should be doing and in my family, we always say thinking outside the box, how can we do something that is different than everyone else but it is going to have either similar or better results and maybe hopefully, we spend less money doing it, that's kind of what I think about an entrepreneur. I think that's really the key for entrepreneurs, most of them think differently and they at the end of the day either succeed or they fail but usually if they are an entrepreneur when they fail it is not really a failure, it is more of an opportunity to learn and then do something else and then if you fail again, then you just go do something else and that's just how entrepreneurs think. They don't think of failure as the end, they think of it as a new beginning to start something else or to do something else or to get a new job and to make more money or to make more time for yourself to spend with your family or whatever it is that you are looking for. So far, we have heard that entrerpreneurs are optimistic about their own abilities, have a tolerance for ambiguity and a different way of looking at failure. Now let’s turn to the investors that fund entrepreneurial businesses. Should you talk about risk when you pitch your business to investor? Overwhelmingly, investors tell me YES – every pitch should acknowledge and address the risks of the business. If you don’t, investors will conclude you haven’t really done your homework. So let’s take a look at some of the risks and their causes. In the next clip, Alison Gerlach, a successful serial entrepreneurs and technology consultant comments on the risks faced by new businesses. Gerlach16_kindsOfRiskThere are sort of three different risks. The first one is the technology risk and every company has this risk. I don't care what kind of company you are. Every company has this risk. I have a chocolate company and I have a technological risk, right? It's exceedingly low. If all of my technology and automation went down, I can still create my product. So that's the first risk and whether you're chocolate or you're super hi-tech that thing that's going to be so great and fabulous and new. You gotta make sure can you make your product and will it work. Second one is an operational risk. Okay, you can make your widget, but can you make a lot of them, and is there a scale to making a lot of them or are they going to get more and more expensive as you keep making them and can you distribute them out there. It might be very easy to produce a million of your widgets, but may be there's some governmental regulations or there is some union rules about distributing to certain outlets or there is some sort, I worked with a sports technology firm that had this fabulous interesting technology, I mean incredibly huge sports fan, so I loved working with this company and I got to talk with the NFL and the NHL, and the NBA and learn all about their things and one thing I learned is you've got owners issues, you've got players unions, you've got lots of different things, so while our technology was great and fabulous and seemed to fit in the industry and everything was going to be great, there were so many impediments to the distribution and where the money was allowed to flow and who held licenses and didn't, that's not what I mean by operational risk. In a service company, you're operational risk is huge. You may not be distributing a widget, but you're going to have to have lots of people and there is no greater operational risk than having to manage a room full of people or remote people. That's also a huge operational risk, one that can really only be mitigated by very experienced managers and that would be the first thing that any investor will ask you if you have a service company is who's your really great manager who has managed lots of people, so I can make sure that all your people aren't just going to revolt and leave you or have terrible quality for your product. The last one is the marketing risk. Okay, so you said you can make your widget, you can distribute your widget, and now will anyone buy it and will they buy it with money out of their own wallet that costs more, that is more money, than it costs you to make it and get it to them. And this is how you have to build a business plan. One important amendment to Allison’s list is to include management risk. Every investor I have ever interviewed tells me that the number one thing they think about in evaluating a new business is the management team. The point is made eloquently by Brian Magierski, founder, President & CEO of Kalivo, Inc., a leading provider of web software that enables companies to engage directly with their customers across the Web – a real Web 2.0 company! Magierski18_importanceOfManagementThe management team is huge. It's absolutely critical when pitching investors and even when starting your company. There are a whole bunch of different phrases and terms that we will use for this, but they'll back an A team with a B plan but not an A plan with a B team. And I think that's important because, it's because of that execution issue we talked about earlier. The biggest challenge is in making sure that you can execute through the peaks and the valleys and the issues you're going to run into. And starting with that core nugget and building it into a business and that comes down to the people and it comes down to the management team being able to process the feedback from the market, incorporate that and adjust and make course directions all the way through. And the investors when they want to back something, they look at management risk, market risk, technology risk and the management risk is a huge one and if that's very high the chances of getting an investment are slim to none from anybody that's worth their weight in salt in investing. So we see that while entrepreneurs are optimists and can tolerate failure, they still need to evaluate all the risks that they face. And that’s where the business plan comes into play. The plan can help you understand risk in three ways:First, your market research on the industry, competitor and customer will help you be realistic about whether you have identified an urgent need in the marketplace, sometimes called a “pain point”. In other words, you need to be sure you have a strong “value proposition” to the customer or not. Next, your plan of operations forces you to think through the most important nuts and bolts of the business and can expose certain risks in the process, such as securing a key input or access to a critical market channel. And finally, building the business model for the plan helps you get a handle on what really drives revenues. Towards Brian Magierski’s point, the plan is your primary tool to show the investors that the management risk is low and that the other risks are well known by the team. All this helps make the point that risk management is one of the primary motivators for going through the business planning process. We’ll get started on an overview of the business plan in the next podcast of this series. Until then, I’ll leave you with this final comment from Tom Szaky, of TerraCycle, talking to a room full of Cornell students about his experience starting a company: Szaky10_riskA lot of it is luck. I don't think I am any different than you guys really. I just maybe jumped off the deep end. And once you are in you have to learn how to swim or you drown, right? That is sort of the best paradigm I can give because you know, the moment you - you take the plunge you - you know, well you have to - I don't know what prepared me for it. But just you know, your personality has to be willing to be - I mean what is the personality trait of an entrepreneur? You have to - entrepreneurs hate risk. Like it sucks. But you have to be very willing to live in an incredibly risky environment. Emotions going in every which way to huge ends of the spectrum. And then you have to be - it's not just the risk of yourself. The moment you start bringing people on, now you are responsible for them. We have you know, over 40 people working at TerraCycle who have kids in college, who have all this stuff. And suddenly you know, you have to take on their risk and absorb it. And what got me all excited about, it's the coolest - I mean I will give you my job description in a minute. But it is the coolest high in a sense because you get to create something that gets put into reality right away. And it is the neatest vehicle to work with. I mean put yourself in my shoes. You get to be 23. You know you are managing a couple hundred thousand dollar a month account. You know, like it costs just about that to keep the company running. You know and there is people. And you suddenly start to find the ability to make changes in places. It is sort of like you know, when I came to college or even high school. When you get into a new group, it is very intimidating when you get there at the beginning. But once you understand how the whole system works you realize that you can become a player in it. And then you can start making more and more changes to your surroundings. Whether that is in a high school environment and you start putting on shows. Or you get involved in whatever and you make changes, which is neat, or in college. Or in the bigger world. I mean you know, they will do - give you that speech when you graduate I guess. Right, welcome to the real world. It is not that much different. It's just probably an order of magnitude bigger. And it is - for me at least it is not work. So it is just an exciting ride. And it keeps getting bigger and bigger. And the most interesting thing is is that what occurs in this? And this is where the risk is. Is, it's always sexy to look into you know these success stories. And we're not necessarily a full success story yet. We're just you know now it is about execution. It is not about our - you know - is Wal-Mart going to say yes. Now it's can we actually make enough of this stuff? So it is a lot easier problem. But many times you look in and you see these stories, you know Bill Gates and Dell. And all these brilliant people that struck out. You know did a risky thing and then made a huge amount of money. And I remember looking into these. And it is like you know, that can't be me. You know that is just winning the lottery and that sort of thing. And you know the reality of the situation is, and this is the only country in the world I think this is possible. I mean I've - grew up in Europe and Canada. No where else other than America could you do this. Where you can go out, and if you believe strongly enough in your idea, which is the most important thing. Right. You have to believe. Then if - and it has to have merit. And I would assume that an idea couldn't make you guys believe unless it had merit. I mean that is why you know you are smart people. Right. And that's - you know it would be foolish to have a foolish idea create merit for you. But assuming you have convinced yourself, and you believe so strongly. Then if you can convince everyone else to believe in participating in your idea you can accomplish pretty much anything you want.
|
Share
RSS