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Entrepreneurs actually try to minimize risk

Entrepreneurs actually try to minimize risk
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First Published: Wed, May 13 2009. 11 10 PM IST

Updated: Wed, May 13 2009. 11 10 PM IST
One thing I have heard being said about entrepreneurs most often is that they take risks. The implication seems to be that entrepreneurs are daredevils who will willingly defy death because risk is an aphrodisiac for them; they actually seek and enjoy risk.
Nothing could be further from the truth. Every entrepreneur I have known is risk-averse. I will go so far as to say that most entrepreneurs are really cautious people; they think a hundred times before making any significant investment. Entrepreneurs are rational people; they try to minimize risk. Entrepreneurs seek to understand, manage and mitigate risk, and then, of the various alternative courses of action available, go for the one that carries the least risk.
So how do entrepreneurs go about minimizing risks when they are starting out? Different people do it in different ways. Some would put aside a nest egg in the bank that would suffice for personal and family expenses for two or three years. Others would ensure that there is some income coming in independent of the business to run the house. It could be rental from a property or a spouse’s salary.
Another way would be to do some work that is not the main business, but which ensures a steady income without being full-time—teaching, training, a consulting retainer, periodic short-term assignments, writing a newspaper column, among others—anything that gets in some small steady income while leaving enough time to pursue the main business.
Many companies pursue one business in the short run in order to get some money for the longer-term dream, which could be another business. For instance, a number of start-ups working on a software product fund the development expenditure by doing software services work early on. How many entrepreneurs do you know who started their companies from their homes? Who did not take on the overhead of salaried employees early on and instead, worked with business associates who got a revenue or a profit share but no fixed salary? Who gave large chunks of equity to initial colleagues instead of a salary?
I myself employed most of these methods of reducing risk early on. The point is that there are hundreds of small ways through which start-up entrepreneurs reduce risks. Those I have listed above are only some of them.
I would even say that entrepreneurs show greater risk-averse behaviour compared with employee managers. The reason is simple—it’s the entrepreneur’s own money. It’s his life on the line. He can’t afford to go bust. If he does, he will lose everything he has. He will have to start his life all over again. What’s more, he can’t walk away from his business easily; there are employees and creditors to be paid and customer commitments to be met. He is personally accountable. Therefore, he takes fewer chances.
What I have said is true of many start-up entrepreneurs who do not take external funding immediately, who try and first bootstrap their companies.
Entrepreneurs who get generous venture capital funding early on frequently don’t display the mindset of frugality that bootstrapping a business instils. They usually don’t understand the value of money and how difficult it is for a business to earn it. Many of the dotcoms that got funded in the last bubble failed precisely because they got too much money too soon.
The entrepreneurs did not understand the importance of being tight-fisted and minimizing risk. These entrepreneurs ended up taking somewhat injudicious risks with money they got easily from other people. They were actually not taking a personal risk; they had not bet their own money. Most went back to being professional managers in large companies pretty soon.
But don’t many entrepreneurs choose to leave secure corporate jobs and embrace the uncertainty of entrepreneurship? Isn’t that a prime example of embracing risk?
Well, not really. The point is that the lower-risk corporate job was not taking the entrepreneur where he wanted to go. He did not want to lead that life. His goals were different. And he believed entrepreneurship would get him there. So once he was clear about his goals, he would go about moving towards them in the manner that minimized his risk.
The point is—entrepreneurs have different goals.
The author is co-founder and chief executive officer, Info Edge (India) Ltd, which runs the Web portal Naukri.com. He writes a monthly column on careers and enterprise.
Respond to this column at onthejob@livemint.com
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First Published: Wed, May 13 2009. 11 10 PM IST