RISK: IDENTIFY, PRIORITIZE, AND MANAGE IT (Part 1)

(First in a 3 part installment)

A Google alert steered me to an article called “Beating the Odds When You Launch a New Venture” that had just come out in the May issue of Harvard Business Review, authored by Clark G. Gilbert and Matthew J. Eyring. It was one of the best pieces Iʼve ever read about entrepreneurs, their attitudes, and management of risk. They said that entrepreneurs arenʼt cowboys—theyʼre methodical managers of risk.

I thought their concepts applied equally to small and big business. I contacted one of the authors, Clark Gilbert, to discuss his ideas and decided I wanted to share his thoughts with my small business friends. The result is my interview (below) with Clark.

My comments follow his answers and are primarily addressed to small business owners.

Clark Gilbert (gilbert@deseretdigital.com) is the president and CEO of Deseret Digital Media and was formerly a professor at Harvard Business School.

1. BR: Do you think Small Businesses spend enough time identifying their risks and planning on how to deal with them?

CG: Because capital is scarce, start-ups are not likely to get very far without having to adjust to data from the market. In this sense risk identification is almost “imposed” on a start-up. The scarcity of capital forces discipline. That said, entrepreneurs who think more carefully about the risks they face, systematically target the most critical risks, and remove them will be more successful that those who do not. When you start a new venture, you donʼt have all the data to make the right decisions. You just have to wade into the venture process and learn from the data that comes out. For example, you might have a hypothesis about the pricing structure and you can do things to test it, but until you actually close a sale, you donʼt have the data as to the price people are really willing to pay.

BR: I have found that in start-ups and small businesses, so much time and energy is spent on putting out fires and surviving, that risk management gets short changed. Periodic time outs for reflection are needed.

2. BR: Does this differ between start-ups and established companies?

CG: Believe it or not, one advantage start-ups often have vs. established companies is the lack of available capital. This forces start-ups to be more disciplined with their at-risk capital either because it is scarce or it will cost them equity. Too often, big companies had an overabundance of capital, which makes them less responsive to changes they need to make while the venture is being formatively developed.

BR: To bolster this point and no. 1, I would like to tell you about an interview I had with Stephen Gordon, the founder of Restoration Hardware. In response to my asking, “What were the factors that most contributed to your success?” He answered, “If sufficient capital had been available to me in the companyʼs early stages, I might not have been as successful as I was.” I myself learned that Bootstrapping out of necessity helps you form good habits that stand you in good stead even when you are in a healthy cash position.

3. BR: Do you think Entrepreneurs go into their own business with the idea that they must take risks to be successful and therefore accept more risk than they are comfortable with or capable of overcoming?

CG: Good entrepreneurs donʼt take risks, they manage them. Of course you can manage them completely away, but what I find differentiates good entrepreneurs from others is the ability to not to take risks, but to manage them.

BR: I believe the media has promoted the idea that to be successful, entrepreneurs must see and take on risk. (Think of reality shows like the Apprentice and Shark Tank.) Those that buy into this and donʼt identify risks, no less manage them, will find themselves a statistic in the long list of failed companies. It is surely a myth that good entrepreneurs love risk.

4. BR: In your recent article for Harvard Business Review titled “Beating the Odds When You Launch a New Venture,” you refer to the R&R case to illustrate some of your premises. As I have an intimate knowledge of this case, I was wondering if you thought its lessons apply to service companies as well as to product ones, which R&R is? Also if they apply to large companies, which R&R was not?

CG: I have used the R&R case with non-profit leaders, Fortune 500 companies, and more traditional entrepreneurs. Its lesson applies universally and grows from the idea that entrepreneurship is a way of managing, not a type of company. I remember teaching the case to the new venture group of a major U.S. media company when the lights went on for everyone. They had initially looked at the case as something for a small business owner. But as they got in and looked at how you used risk reduction not just to save money, but to fundamentally increase the prospects of the venture, their perspective began to change. Ironically, the scarcity of capital imposed on the start-up entrepreneur gives him an advantage over big corporations with all of their resources. One executive finally realized: “We need to manage like we donʼt have capital, not to save money, but to raise the probability that we find a winning strategy.”

BR: When the Harvard Business School case was written, R&R was my one person company in a small office in New York City. The case was about my venture to ride the coattails of the rapidly rising Trivial Pursuit game. To give R&R credibility, we obtained a license form TV Guide to use their name and create the 6,000 questions that were needed. It was a time sensitive project as we knew the large toy companies were developing their own Trivia games. Briefly, we outsourced the manufacturing, selling, shipping, and financing of the game. Our major RISK was that we wouldnʼt get the purchase orders we wanted because the large toy companies, who promote their games on TV and Trivial Pursuit reorders would come ahead of us in the order chain. To combat this risk, we asked for and received 5 free ads in TV Guide in exchange for increased royalties. We then promised major retailers their names in these expensive ads at no cost to them. This translated into immediate purchase orders of $3,000,000 prior to our first shipments and eliminated our risk. (This case and all the Bootstrapping tactics employed are spelled out in my book, Bootstrapping 101.)

Part 2 Continued Next Week…

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