Risk is a four-letter word. Manage risk well and you can make a fortune. Manage risk poorly and you could lose a colossal fortune.
A few daredevils like risk and cannot live without it. They careen from risk to risk. Ask Eike Battista, one of Brazil’s most dynamic entrepreneurs. Battista managed to build one of the world’s great fortunes, and then lost most of it. He knew when to take risks. But he obviously did not reduce them. Most do not like risk since they see the loss more clearly than they see the gain.
My father was an actuary (an insurance expert who specializes in risk), and one of my first lessons about money was that risk is not inherently good or bad – you just have to manage it or you will pay the price. If you are asked to assume risk, the one doing the asking needs to pay you. And you should be sure that you are not wiped out by the event happening – unless, of course, you cannot live without such ...view middle of the document...
So you can bet on anything – just know the odds of success and failure.
VCs manage risk by investing:
Mainly in Silicon Valley (because that’s where the home runs have been)
Mainly in later stages after the major risk has been reduced
By controlling the venture and replacing the founder entrepreneurs (you) with an experienced executive. They did this with Steve Jobs also – you know how that turned out.
Bankers cut risk by seeking an alternate form of repayment, i.e. collateral. They need this in case the primary form, cash flow, fails to work as planned.
Executives cut risk by avoiding high-risk, revolutionary changes. Instead they focus on minor, evolutionary enhancements. This is wise in the short term when revolutionary changes may not be around to destroy their cozy industry. In the long term, revolutionary changes may undercut their basic business. Those who do not adapt, die. Executives hope that this doesn’t happen on their watch.
Entrepreneurs cannot diversify. They don’t have the resources in time or capacity or money. Entrepreneurs cannot measure risk because they are measuring themselves and their own capacity. The entrepreneur’s key strength is focus. Lose this and the odds are that you will fail. Entrepreneurs cannot charge anyone else to take the risk. They need to get in during the early stage when the risk is high. They have to give collateral to the bankers to reduce the financiers’ risk. They need to push the venture forward until take off and the VCs see value.
What entrepreneurs need to learn is to cut risk until take off. To do this, they need to know capital efficiency.
MY TAKE: Entrepreneurs can reduce risk while still shooting for profits by adjusting to the times and serve changing needs and new markets better than their competitors. That’s how entrepreneurs (and executives) reduce risk. This is what Steve Jobs did – and he did it brilliantly. This means that you need to know the trends – in your products, technology, markets, industry, and in the factors that influence these such as the government and the environment. Then you need to imitate and improve.