Conventional wisdom is that risk and return are related – that the higher the risk, the higher the return. But many successful people did not take huge risks in terms of risking their capital, yet were still rewarded.  Find out how they took a different risk / return perspective on their road to success.

Most people see entrepreneurs as people who take a huge risk and put their entire wealth on the line. The reality is somewhat different. That type of behaviour is more prevalent when the person taking the risk has little accountability for their actions, like investment bankers. No-one will bail out the individual entrepreneur with public money, so he minimises risk and uses capital leverage (such as by building sweat equity) as much as possible.

The entrepreneur looks for situations that have a large payoff but put minimal capital at risk, despite having a high chance of failure. It is a numbers game -the entrepreneur will keep trying until one of the bets pays off. Of course, she also uses business experience to cut the risks and give every venture the best chance of success, by properly marketing the business. Sales (which come from effective marketing) are the key critical success factor in the survival of a business.

Here’s an example. A female entrepreneur started off by selling second-hand baby clothes on EBay, and then a few other items of women’s fashion. After a while, she established supplier relationships. Many local suppliers didn’t want to deal with her but she found some that did. After a while, she realised that she needed her own website, so got a relative in IT to do the work and get a site built. Everything was done on a shoestring. At no time did she ever have more than $1000 in the venture.

Initially she tried to sell plus sized garments but realised that the business was not profitable in that market, so was able to relaunch with evening wear.

Three years later, and thousands of visitors per month check out the site, she sources products from the USA and has a person to help with packing and dispatch.

This is a perfect example of an entrepreneur taking a risk, yet risking very little. As an Internet based business, there was no storefront and minimal stock. A relative was used to provide technical assistance at no cost. The entrepreneur in effect leveraged capital.

The critical success factor is the willingness to start a business and stick with a business plan until the business is either a clear winner or loser. If it is a loser, the entrepreneur learns from the mistake and tries again in a new venture. Since they have not risked too much compared to the payoff, they can come back and have another attempt.

Here’s the story of another person in the same business.  The capital came from a payout and she opened a store in an industrial area, using the money for stock and fittings. The shop is not well laid out and struggles to survive. Stock has consumed a lot of capital.  This was a high risk venture, made riskier by fact that it used all the entrepreneur’s capital, which was not effectively leveraged. When it fails, the entrepreneur will be unable to try again.

In summary, successful entrepreneurs are risk avoiders rather than risk embracers. They view risk in terms of how much capital is at stake rather than chances of failure. Entrepreneurs are comfortable with failure but not comfortable with risk.

Tags: entrepreneur, risk

This entry was posted on Sunday, April 11th, 2010 at 4:29 pm and is filed under Business tools. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.