RISK
An Entrepreneurial Perspective
Why “Risk” May Not Be What It Appears
How to View Risk Entrepreneurially
Dr. Wendell E. Dunn, IIIUniversity of Virginia
Copyright 2002 by Wendell E. Dunn, III All rights reserved.
“RISK”A Working Definition
Risk“expected value of an adverse outcome”
Expected“probability/likelihood the event”
Value“impact/cost/implications of the event”
RISKY STATEMENTSMyth or Verity?
“Risk is a normal cost of doing business”
“Entrepreneurship means Small Business”
“Entrepreneurs are Risk-takers”
“Risk is Risk”
RISKY STATEMENTSMyth or Verity?
“Law of the Conservation of Risk”
“No Pain (Risk), No Gain (Reward)”
“Venturing is (inherently) ‘High Risk’”
RISK TYPESEntrepreneurs’ Perspective
“Business Risk”
Managerial (inadequate skill)
Market Demand (inadequate revenue)
Technological (core obsolescence)
Liability (liability, regulatory)
Liquidity (cash flow, cash out)
Financial (leverage, portfolio)
RISK TYPESEntrepreneurs’ Perspective
“Personal Risk”
Career (restart, opportunity cost)
Private Life (health, stress, family)
“Entrepreneurial Risk”
Exposure of (all) your assets to failure
RISKAlternative Perspectives &
Constructs
Finance: “Economic” vs. “Financial”
Portfolio: “Systematic” vs. “Un-systematic”
Insurance: “Pure” vs. “Speculative”
Entrepreneurial: “Essential” vs. “Optional”
OBSERVATIONSRisk & Behavior
Under-estimate familiar risks
Over-estimate unknown risks
Take unnecessary risks unknowingly
Most don’t (willingly) bear “extra” Risk
Many don’t recognize optional Risk
Risks taken are often assumed necessary
OBSERVATIONSRisk & Behavior
Risk “assumption” can be expensive
Negative market premium for excess
Risk
Risk is not borne by us alone customers, suppliers, employees, lenders,
investors, competitors, families,...
RISK MANAGEMENT What Entrepreneurs Know
Valuation ƒ perceived Risk, Return
Risk inversely related to Valuation
Risk perception is non-linear
Risks can be avoided (acquire assets)
Risk can be reduced, if not eliminated
RISK MANAGEMENT What Entrepreneurs Know
Risk can be divided (e.g., derivatives)
Risk can be shifted; transferred to
others
Risk can be shared with “partners”
Risk can be insured (for a fee premium)
RISK REDUCTIONTime-Honored (Insurance)
Techniques
Collect: any risk for a price, but get
paid
Information:“Know thy Customer”
Document: “Trust, but verify”
Cull: lose the Losers
Un-bundle: reinsure the most-risky parts
RISK REDUCTIONTime-Honored (Insurance)
Techniques
Safety: please, don’t feed the lawyers!
Educate: help policyholders help you
Protect: asset confidentiality/security
Kindness: the Golden Rule
RISK REDUCTIONSome Basic Mechanisms
K.I.S.S.: minimize system complexity
Innovate: simpler, faster, safer,
cheaper
Piggy-back: exploit marginalities
Skinny: minimum effective resources
un-Leverage: less debt (if advisable)
RISK REDUCTIONSome Basic Mechanisms
Leverage “intangible” (capital) assets
Parsimony: substitute sources (1st Law)
Isolate: compartmentalize risk (assets)
Exploit non-linearity in risk-reward
Stealth: “what they can’t see …”
RISK SHIFTING Some Basic Mechanisms
Superior Negotiations
Outsourcing: “Tom Sawyer Gambit”
Contingency Clauses (if, then …)
Negotiated Transfer (use “specialists”)
Compensated Transfer (e.g., insurance)
RISK SHARING Some Basic Mechanisms
Co-opt Stakeholders to create Partners
“OPM” (Other People’s Money) co-principals
co-investors
employees (401K investors)
customers
suppliers
RISK SHARING Some Basic Mechanisms
Pooled information (same assumptions)
Franchise (operating, financing growth)
DEVELOPMENT STAGE RISK LIMITATION
Lessons Learned the Hard Way
Rely on time-tested people
Identify, test, model key assumptions
Limit commitments (“toe-in-the-water”)
Fail Early, Fail Cheaply
(pharmaceuticals)
DEVELOPMENT STAGE RISK LIMITATION
Lessons Learned the Hard Way
Spend imagination and guts, not cash
Joint venture large, risky projects
Consider 2nd unless 1st takes the game
INCREASE COMPETITORS’ RISKSSome Basic Mechanisms
Exploit “Paradigm Paralysis” (blind spots)
Strive for “discontinuous innovation”
Obsolete existing investments
Let large firms spend rather than think
Undermine their business assumptions
Help them believe their own “hype”
DECREASE CUSTOMERS’ RISKS
How Entrepreneurs Sell
Hear and address “buying objections”
Identify risk-based “hurdles” (criteria)
Identify misperceived, exaggerated risks
Address “risk” concerns directly
Identify means to avoid/reduce/shift/share
Resolve residual risk with “guarantees”
CONCLUSIONSome “Take-Aways” on Risk
“Risk” has many forms and faces
Some risks are optional
Optional risks are expensive
Risk-taking should be relative to return
Not all risks have returns
Top Related