How Much Risk Can You Take?
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.
It was an extraordinary achievement that she accomplished by risking everything she had--including all of her savings, every dime she could borrow on her house, and $150,000 in loans from family and friends. With little more than guts, chutzpah, and tenacity, she overcame every obstacle in her path and beat the extremely long odds. I couldn't help but admire her willingness to put herself to such a test. Although I would never have guessed it by looking at her, I concluded that Malki was a natural-born risk-taker.
You can therefore imagine how perplexing it has been to watch her struggle for the past year as she has tried to decide whether to expand her current facility or move to a larger one. She feels as though she has to do something. Her daycare center has been wildly successful and is now bursting at the seams. There's a waiting list to get into it. Malki has had to turn customers away. What's more, she wants the business to grow. She's restless. She feels that she needs a new challenge. But she can't bring herself to make a commitment. Instead she vacillates and equivocates. I've talked to her three or four times, and she keeps raising concerns: A new building would be expensive; she'd have to borrow the money; what if she can't find enough customers to generate the extra cash she would need to cover her loan payments? And so on.
Now, it's true that expanding an existing business--any business--involves some risk. There's always a chance that the demand won't hold up, and you'll be stuck with excess capacity and more debt than you can handle. But that risk is usually small compared with the risk at start-up. In Malki's case, the growth risk is a small fraction of the risk she took when she started. After six years, she has a solid track record. She has proved that she knows how to run a profitable daycare center, and how to attract customers--not that she needs to. Customers are beating down her doors to get in. And a lender can see that. As a result, she would be able to borrow the money she needs from a bank, which was impossible the first time. Of course, she shouldn't go overboard and expand recklessly, but there's virtually no chance that she would. At this point, she is much too cautious to do that. And I wouldn't let her do it in any case.
At first, she felt she had nothing to lose. Only now, with her business going strong, was she suddenly aware of risk, and it was paralyzing her.
So what accounts for Malki's newfound aversion to risk? I was baffled at first. Then it hit me: I had been wrong in my initial assessment. She was not a risk-taker. Although I had thought she was assuming enormous risk when she started the business, she had not regarded what she was doing as risky at all. At the time, she was so dissatisfied with her situation that she felt as though she had nothing to lose. Only now, with her business going strong, was she suddenly aware of risk, and it was paralyzing her.
But that kind of fear is possible to deal with. We can reduce the risk to numbers. How much would Malki need to borrow? How long would it take to do the expansion of the old building, or to get a new one ready to operate? How many additional children would she need to cover the cost of the loan? How quickly could she sign them up? After we've gathered all the numbers, Malki will be able to assess the risk more clearly and decide whether she can live with it.
But we've already taken the first step, which is critical. We've determined what kind of an entrepreneur Malki is--a risk-avoider, not a risk-taker. What she needs to understand is that she can't do what she wants without assuming some risk. It goes with the territory. Of course, she could drastically reduce her risk by deciding not to grow, which is a perfectly reasonable option, but I don't think she'd be happy if she did, and it's unnecessary in any event. Risk is not something to fear--unless, of course, you're like me. I just wish someone had told me that before I got into such hot water. Then again, maybe someone tried to, and I wasn't listening.
Norm Brodsky is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham. (firstname.lastname@example.org)
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.