Street Smarts: How Much Risk Can You Take?

There are two kinds of entrepreneurs. You need to know which kind you are.

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In the 26 years I've been in business, I've come to realize that there are two types of people who start companies: those who like risk, and those who don't. Whichever type you may be, there are challenges you need to confront if you want to build your business. Entrepreneurs of the first type had better learn how to rein in their risk-taking, or they'll make bad decisions that put their companies in jeopardy. Those of the second type have to understand that you can't grow without taking risks. The relevant questions are, how much risk can you handle, and how much is required to get you where you want to go?

I happen to be an entrepreneur of the first type. Unfortunately, I didn't realize it until I'd already made a series of decisions that led my company into Chapter 11 and forced me to lay off more than 2,000 employees. That was the most wrenching experience of my business career, and it took a while for me to acknowledge that I was directly responsible for it. In my eagerness to have a $100 million company, I had made a terrible acquisition and then compounded the problem by pouring good money after bad. I hadn't worried about the risk. In fact, I'd enjoyed it. It had made the experience exciting, exhilarating--a test of my business savvy, in which I had total confidence. When the whole thing fell apart, my initial response was to blame forces beyond my control, and there were some. In my heart, however, I knew we could have survived them if I hadn't made such bad decisions early on. Finally I forced myself to admit that the company had gone down the tubes, and those people had lost their jobs, because I liked living dangerously.

Once I had faced up to the reality of my risk-taking personality, I was able to figure out what I could do to make sure that I kept it under control and never let it wreak havoc on my company and my employees again. That involved creating a set of mechanisms that I could use to change my decision-making process. For openers, I resolved that whenever an important decision presented itself, I would not make it without first taking a shower. I do some of my best thinking in the shower, and I take only one a day, in the morning. The rule thus prevented me from making snap decisions about important issues, something that had contributed to my downfall. I also worked hard at becoming a better listener. Looking back, I realized that many people had warned me about the risks I'd been taking, but I hadn't heard them because I didn't like to listen. I decided that, in the future, I would make a point of listening until I clearly understood what people were trying to tell me and why. I'd still make my own decisions, but I'd try to do so with an awareness of other arguments.

The most important rule I came up with, however, had to do with money. After the agony of the layoffs, I vowed I would never again make a decision that would jeopardize my employees' jobs. Although I could still take risks, I would not bet the company. If I invested money in a new project, a new venture, or an acquisition, it had to be an amount I could afford to lose. To be sure, I wouldn't expect to lose it, but I had to know that there would be no serious repercussions for my other businesses if I did. That meant setting an investment limit in advance and sticking to it. As you may recall, that's exactly what I did with the gift and souvenir business I got involved in. (See "Learning From Mistakes," June 2003.) The experience cost me almost $1 million, which was the limit I'd set. When I reached it, I pulled the plug. That hurt. I hate to admit failure. Fortunately, I haven't had to do it very often in recent years.

I don't know how many entrepreneurs are like me, but I suspect we're a small minority. Far from enjoying risk, most people are acutely uncomfortable with it. They tend to focus on the downside, which scares them. That fear is enough to keep many would-be entrepreneurs from going into business. And they aren't wrong to be cautious. Starting a business always involves a certain amount of risk. At the very least, you're risking your current way of life to take a plunge into the unknown. Often you have to risk a great deal more than that: your life savings, your home, your credit, your relationships with the friends and family members you borrow money from. Much as you may crave economic independence, you may not be willing to take a chance on losing everything else to achieve it.

And yet many innately cautious people somehow go forward despite the possibility of failure and its consequences--financial, emotional, and otherwise. A good example is Malki Ben-David. (See "The X Factor," September, 2001.) When I met her about nine years ago, she was a working mother, divorced with three young children, supporting her family by tutoring, teaching, and doing clerical work. She told me she wanted to open her own daycare center for infants and toddlers. The problem was she had no financing, no business experience, no political connections--indeed, none of the resources that are normally a prerequisite for building a business in a highly regulated industry. I gave her no better than a one-in-10 chance of succeeding. Yet she was determined, and I agreed to advise her. Defying my expectations, she managed to put all the pieces together over the next two years and opened her daycare center in July 1999.

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