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Risk, Reward And Worst Case Scenarios: How Entrepreneurs Like Richard Branson And Tony Hsieh Call It

May 11 2014, 12:11pm CDT | by

One of the most fascinating things about entrepreneurs is their attitude to risk. Whether you see a risky idea or proposition as an opportunity or a potential disaster is arguably what sets true and...

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24 weeks ago

Risk, Reward And Worst Case Scenarios: How Entrepreneurs Like Richard Branson And Tony Hsieh Call It

May 11 2014, 12:11pm CDT | by

One of the most fascinating things about entrepreneurs is their attitude to risk.

Whether you see a risky idea or proposition as an opportunity or a potential disaster is arguably what sets true and wannabe entrepreneurs apart.

Many of those I’ve met over the years have taken decisions that had  the potential to damage or even destroy their businesses, soI had to ask, when it comes to risk, how do you know where to draw the line?

‘Screw it let’s do it’ may be his business mantra, but even a renowned risk taker like Richard Branson says there are limits.

Ahead of this week’s Virgin Pitch2Rich event in which he’ll judge six young companies vying for investment funding, with all the risks and challenges of business growth ahead of them, he admitted that protecting the downside was among the best advice he had ever been given.

“As an entrepreneur you should be willing to take risks and trust your judgement when you do, but you always have to think about the worst-case scenario,” he says.

He recalls the most critical situation where he had to strike that balance, launching Virgin Atlantic. It was at the height of Virgin Records’ success, with the likes of the Rolling Stones and Janet Jackson riding high in the charts, and profits rolling in.

“We didn’t really have the funds to start an airline, and none of my fellow directors agreed with me that we should do it,” he says. “Although I believed we could transform the aviation industry by making flying an exciting experience with quality customer service, it was a tough call whether to take the risk or not.”

Having negotiated with Boeing to buy a plane, Branson was able to demonstrate to the Virgin Records board how, in the worst-case scenario, if Virgin Atlantic failed, they would only lose six months of profit.

“They agreed; and we’re still flying high decades later,” he says, with a tone that suggests when it comes to risk, most times he’d ‘screw it and do it’ anyway.

It is one thing to weigh up the risk and go for it. It’s another to simply not see things as being that risky; which seems to be Tony Hsieh’s take on it.

Maybe it’s just the Las Vegas’ high rolling culture, but the Zappos boss, who is swapping management hierarchy for holocracy in his own company, and self funding the transformation of Sin City’s old Downtown area into a brand new business community, to the tune of $350 million, doesn’t consider anything he’s done to be ‘super risky’.

“To me, the worst case scenario is not that bad,” he says, in his trademark laid back style. “I’m lucky to be living in a time and a society where I don’t need to worry about being able to eat or having a friend’s couch I can crash on if things don’t work out from a business perspective.”

Maybe that’s easy to say when you have billions in the bank. What about disruptive entrepreneurs who put their reputations and life savings on the line to shake up established industries?

For Dublin-based Kealan Lennon, founder of e-greeting card business Cleverbug, risk is inherently related to the size of the reward. With his vision of creating a $1bn IPO out of Ireland, he has already turned down several acquisition approaches.

“Maybe that will turn out to be a mistake, but it is a risk calculated relative to the potential reward and achievement of the vision,” he says./>/>

Linda Cheung gave up her high-flying COO role at Morgan Stanley to co-found social CRM and services business CubeSocial. As a youngster she had watched her father run his own business, so an entrepreneurial spirit was in part inevitable; but the risk?

She says: “My inner business sense tells me that risk is not a negative thing. Nor is it necessarily a positive thing, but more a challenge. Risk and reward have to be seen as a balance.

“I knew that I could forego earning an income for a period of time, and our focus during start up was on seeing connections, joining the dots, identifying the opportunities more than the risk. It is about seeing the glass as half full.”

After 23 years of entrepreneurship, German-based business coach Agnes Cserhati shares  asimilar view; instead of seeing  risk, spying  opportunity and challenge.

She says: “Most people thought I was crazy to move AC PowerCoaching from London to Bonn last year. It was successful, in an ideal location, with great contacts and opportunities. To me it was the perfect time to start disrupting the European market.”

Cserhati has also discovered that German attitudes to business risk differ from those in the US or UK. For example, German entrepreneurs have a tendency to be cautious about credit. The majority of firms are in the German ‘Mittelstand’ or SME sector, which contributes over half of total economic output – and finances most of its investment from its own equity.

“From my experience, German entrepreneurs are extremely  innovative, but culturally  more conservative about taking risk,  compared to those in other countries.  That could explain why around 95% of all German firms are family-owned, and largely managed by their owner,” she says.

And that raises the issue of collective attitudes to risk creating barriers to innovation. As serial entrepreneur and chairman of B1G1 Paul Dunn points out, the word ‘entrepreneur’ comes from the French word ‘entreprendre’, meaning to undertake.

“For me that simply means ‘undertaking’ things that we believe can be done to create something magical. And you risk everything to get it done, but you never see it as risky; that’s for others,” he says.

And therein lies the challenge. As the business grows, teams are built, and collectively don’t want to take the ‘risk’ of doing new stuff. It is one of the reasons why innovation can and does decline in larger companies. And perhaps why increasingly we see companies rewarding ‘failure’ so that people are encouraged at every step to risk it all.

Dunn adds: “To quote Einstein; ‘Unless at first the idea is not absurd, then there is no hope for it.’ Long may we entrepreneurs embrace and act on that thought.”

 
Update
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