01 May 2016

Calculating Risk

"Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled."

--Howard Stevenson
Professor Emeritus, Harvard University

Recently someone asked the following question:

"What three things should an entrepreneur do once they decide:  Okay, I'm starting a business." 

Getting started 

The few who start businesses and succeed don't take risks.  They take calculated risks.  Having started two businesses since 1980 (consulting and research) my first thought was to reduce financial exposure by making sure, to the extent possible, there was a reasonable chance of succeeding. 

For example, in selling market research I asked for a 50% deposit and worked off of other people's money (OPM). Then required the balance upon delivery of the final report.  In the digital age those transactions could all be online. 

The deposit approach came to our attention while reading about the creation of Encyclopedia Britannica, first published in 1768, Edinburgh, Scotland.  To get working capital founders Colin Macfarquhar, Andrew Bell and Archibald Constable used deposits from customers to provide cash flow. 

This illustration of accessing capital by sharing risk seems quaint by today's "unicorn" investment standards ($1 billion market value for tech start-ups), but it was a business model right for the times.

Entrepreneurship in decline

According to The Washington Post research shows the U.S. rate of new business creation, which peaked about a decade ago, plunged more than 30% during the 'great recession' and has struggled to regain its footings.

That's going in the wrong direction since the 25-55 age category, a prime demographic for starting new businesses, is rapidly expanding according to the Kauffman Foundation.

Fewer start-ups means fewer new jobs.

To back up these trend lines look below at business closings:

One more chart. 

This time tracking long-established businesses which are an increasing percentage of U.S. firms.  Those in business for more than five years account for just over two-thirds of companies.  The proportion of companies of every age from one to five years old has decreased over the past 35 years, based on the Post report.

Kauffman believes that Millennials have the best opportunity to turn these numbers around, but they aren't starting businesses.  Their demographic, 20-34, shows a sharp drop in new formations since 2010 even though they have higher levels of education than previous generations, says Kauffman.

A survey by Hewlett-Packard Enterprise of 13-17 year-olds found that the entrepreneurial drive for Generation Z sets in around 29, the average age which 79% of teens expect to be ready to lead or found their own company.

What to do

Back to our checklist of three things someone might consider doing if they are dead set on moving ahead:

1. Study the definition of an entrepreneur at the top of this post.  Come to terms with the reality that you're not likely to have all the resources at hand when you launch a product or service, yet you still move ahead.  If you need full funding up front then you're likely a bureaucrat, not the venturesome type. 

The definition from Professor Stevenson is a reminder of how little control you'll have over the start-up process, and beyond.

2. Look at yourself carefully.  Who are you?  Entrepreneurship is about people, first, and ideas, second.  Investors look closely at background and character, investing as much or more in individuals with promise as ideas on paper.  There should be flexibility in your human wiring as the need to adjust and transition is ever-present. 

As someone once said, "If you don't bend, you'll break." 

3. Be accountable from the beginning.  To someone or some group.  I created an advisory board and had several mentors who, over time, exhibited wisdom and good judgment.  A corporate attorney and CPA were essential to starting and managing the business.     

Even though this new enterprise should be fun, entrepreneurship can take a toll physically, mentally, and financially.  Take care of yourself, family, and employees.

The power of incubation

I include in No. 3 the possibility of getting into an incubation program sponsored by a nearby university, state, or nonprofit association. 

If you can survive long enough to get out of the house or garage, having an office in an incubator, where you can mix with peers, develop a disciplined work schedule, and gain access to professional resources, is all for the good.

Something to read

Finally, I would consider reading, Breakthrough Entrepreneurship, by entrepreneur and teacher, Jon Burgstone and writer Bill Murphy, Jr.  What you learn is how to find and fill unmet customer needs. 

For as Peter Drucker once said, "The purpose of a business is to create and keep a customer."    


(C) Bredholt & Co.