Risky BusinessPosted on Thursday, December 12th, 2013 by Mark Mehler
Business is all about risk, but how much of a gambler should you be these days? We asked experts and entrepreneurs for their take on rolling the dice—and winning..
The owner of a small but fast-growing East Coast manufacturing business fancied himself a superb judge of executive talent. So superb, in fact, that not long ago he hired a second-in-command a day after meeting the gentleman at a cocktail party.
Another entrepreneur, the owner of a small chain of music studios, ran his business with the élan of a riverboat gambler. On a whim, he bought seven more studios—without bothering to calculate how they could be integrated into his business and operated at a profit. “It just feels like the right thing,” he told friends.
As it turned out, neither of those rash decisions led to disaster. The first owner ultimately took steps to mitigate his risk— he created a non-compete clause and a job definition for the new exec, and established concrete performance measurements. So far, the new guy is making a positive contribution to the business. Meanwhile, the music- studio boss has developed a marketing plan to fill his new facilities; he’s added dance classes, acting classes and other nontraditional services. The plan is already working at two of the new studios, and expectations for the five others are high.
Still, according to experts in risk management, business decisions driven by egotism, narcissism and blind ambition are nearly always doomed to failure.
“I see tremendous naiveté among small-business risk-takers,” says James Champy, a consultant and author of The Arc of Ambition—Defining the Leadership Journey, which explores the entrepreneurial lifecycle. “They have deeply held beliefs in what they’re doing. This includes the belief that if they focus too much on their business limitations, they’ll limit their ambition. “So they overreach, underestimate the time and effort required to succeed, and finally, exhaust their resources.”
Terri Levine, a Pennsylvania-based executive coach, sees the issue in terms of a razor’s edge. The qualities that create successful entrepreneurs—self-confidence, fierce ambition, absolute certainty that, somehow, everything will work out to their advantage—are the same qualities that lead them to take untenable risks.
“It’s okay to trust your gut, especially if it has worked for you before,” Levine says. “But before you leap, take the time to calculate the possible outcomes. Risk taking should not be the same thing as betting a hunch on the ponies.”
John Bugalla, a managing director in the risk-management practice of Aon Corp. in Chicago, agrees. He has seen countless small-business owners bet the farm on “change the world” schemes—while denying that they are taking any risk at all. “These are the cowboys and cowgirls who wind up declaring bankruptcy,” he says.
The successful risk-takers, Bugalla adds, are those who research their markets and prepare their businesses to seize opportunities when they present themselves. Also, they’re not averse to buying some basic protection: liability insurance, workers’ compensation, property insurance, key-man life insurance or trade-credit insurance (for overseas transactions).
Barry Silverman, a New Jersey– based small-business coach, constantly urges his clients to balance their risk-taking personalities with an understanding of the barriers to their ambition. One way to do that, he says, is to not surround themselves with other gambling fools.
“Have at least one senior person in your organization whose opinions you value and whose conservative views will help ground you in reality,” suggests Silverman.
In other words, no entrepreneur is an island. And no gut-level risk is crazy—especially if a solid rationale and thorough homework are behind it.
Been There, Risked That
When it comes to risk and small business, entrepreneurs have already taken the first big step: launching a company. But the risks don’t end there. Do you introduce a new product line? Hire a new sales team for an untapped market? Add 100 seats to your restaurant? It goes on. And so do the stories. Here are a few.
Factory: “By definition, all entrepreneurs are a little crazy,” says Weinberger.
The Innovation Factory
Risk Factor: Churning out new ideas—and investing in them.
Marvin Weinberger had to admit that it was a tempting option: License his new inventions, sit back and cash what promised to be some handsome royalty checks. But once an entrepreneur, always an entrepreneur, he says. So instead of Easy Street, Weinberger and his partner, Tucker Marion, chose the path of greater resistance—building a company by creating and sustaining a product brand.
“By definition, all entrepreneurs are a little crazy,” Weinberger says. “But there’s good crazy and bad crazy. Hopefully, after 20 years of doing this, I’ve learned to filter the noise so that my strong ego and gung-ho attitude don’t get in the way of seeing an objective clearly and supporting it with meticulous research.”
The saga of Weinberger’s latest company, Innovation Factory, began two years ago, when he and Marion were on a cross-country flight to make a pitch to a toy company. Weinberger complained to his partner about how difficult it had been that morning to clear the ice and snow from his car. By the time their flight arrived in San Francisco, the two men had sketched out a rough design for a new product to remove ice from an automobile by cracking rather than scraping it. The “IceDozer” also employed a bulldozer-type blade to shove the ice aside. Since then, the partners have developed a second auto safety device, the “SnowMover.”
Weinberger and Marion currently run a virtual corporation, farming out all their manufacturing, distribution and sales activities, and focusing their time and energy on designing and developing an entire line of accessories for safer winter driving. They recently sold a majority interest in Innovation Factory to a group of private investors; the infusion of cash, after two years of bootstrapping, will allow them to go forward with their ambitious growth plan.
“The risk here is losing control of our company,” Weinberger acknowledges. “But the greater risk was sitting back and getting pre-empted by competitors. We have confidence in our investors, and we’ve got the market research to back up our belief in the product line. We’re not Las Vegas gamblers. We know our strengths and weaknesses, and we’re clear about where we’re going.”
North Star Marketing
Risk Factor: New software— or bust.
North Star, a six-year-old marketing and public relations firm, still carries a new-age aura reminiscent of the golden era of the dot-coms. The head of the firm, April Williams-McCrory, bears the title of corporate “visionary.” Other key managers include the “princess of process” and the “PR diva.”
But don’t let the puffy titles fool you. North Star is more than a group of dreamers banking on a never-
“We’ve had to struggle through some bad times,” says Williams-McCrory. “Two years ago, when the phones stopped ringing entirely, we thought of saying goodbye, but my board of directors told me to hang tight. We kept pounding on clients’ doors, letting them know we were still here.”
Two years later, Williams-McCrory is glad she decided not to pack it in. The company is about to embark on a major expansion of its business via a new software application, called eGlue, which will enable North Star’s clients to survey their customers via HTML email and respond immediately to their marketing needs with new campaigns and specialized offers.
For example, if an email marketing survey shows rising consumer demand for navy blue polo shirts, an apparel maker can get back to its retail customers with details on its navy blue shirt line and volume discounts.
For North Star, this was no small risk. The company, with only about $300,000 in annual revenue, invested more than $50,000 in developing the new software. An even bigger risk is the possibility of a major software firm coming along and stealing North Star’s thunder.
But Williams-McCrory says the potential payoff—steady annuity streams that will help balance the vagaries of the PR business—makes those risks worthwhile. North Star has received extensive feedback from its client base that further supports the gamble and has held promising discussions about partnering with advertising agencies. Williams-McCrory says if a big software company were to bull its way into the market, it would be as an “elephant hunter,” going after huge multinational accounts. “That’s not our kind of business,” she says.
Andre van Hoek
A. van Hoek Woodworking Ltd.
Risk Factor: Following his creative heart.
After nearly two decades as an independent building contractor, Andre van Hoek continues to wrestle with two conflicting desires—to give formal structure to his working life and to constantly challenge his restless intelligence with risky new endeavors. But it’s a conflict he can live with.
The structured part—contracting for private residential clients and institutions such as the Guggenheim Museum—is on fairly solid ground, and van Hoek has acquired a four-story building to house his four-man woodworking shop and showroom. This affords him the luxury of taking financial risks on unconventional pet projects: restoring vintage motor homes from the 1960s, for instance.
His recent fascination with motor homes fits with van Hoek’s lifelong passion to study the ways in which human beings use space and how the human–space relationship has informed American history in the past century. “What intrigues me especially about the vintage motor homes is learning how American industrial design in the mid-20th century reflected the romance of the road and expressed a powerful trend in American popular culture,” he says.
But van Hoek says this particular risk may pan out in more ways than merely enlarging his knowledge. He’s in preliminary talks with auto companies about funding his motor-home renovation work and creating “mobile showrooms” that could serve as an educational tool for students of engineering or American history. The renovated motor-home interiors would double as marketing vehicles for van Hoek’s woodworking business.
“The potential—from a business standpoint—is tremendous, especially in terms of networking with prospective clients and getting great publicity,” he says. “But, for me, there’s got to be more to it than that. Why can’t business be fun?”