Risk And The Transformational Entrepreneur

One of the basic laws of economics is the risk-return trade-off, meaning that low risk gives low return while higher returns (profits) necessarily require a higher risk.  That all sounds very good until we’re faced with the real implications of risk in starting a business or launching a new product.  What it means is that the safe and sure road leads to mediocrity.  For those of us working in Turkey where taxes, fees and unscrupulous competition skim the cream off of returns, then mediocrity is likely to lead to bankruptcy!  All this means that survival for a business in Turkey means risk at a level that can cause a lot of knees to knock.  And that means we need to understand how to look at and manage risk.

Managing risk is not the same as avoiding risk.  And taking risks is not the same as doing something stupid with your eyes shut.  There are sane options available! 

Our businesses are built on plans.  We have a new product or a new venture and to implement that we have marketing and development plans, hiring plans, perhaps construction or manufacturing plans and purchasing plans.  Each of these consists of estimates of what we’ll need, what it will cost and what it will produce.  We plan to buy and convert a building for a new restaurant and so we budget the cost of the building, the fees involved in registering it and the cost of construction to renovate it.  We then make assumptions about the time involved in each of these steps so we can determine when to hire staff, implement training, get health department approvals, start marketing, buy production materials and schedule the opening.  Lastly we need to have estimates of the future revenues and operating expenses we’ll have once the restaurant is open.  All of this lets us project future profits that should be more than adequate to pay back the initial investments with some to spare as return to those who put down the money for this venture.

Any plan like this is made of a thousand separate estimates, some really good and some not so good.  For example, we might have a quote in hand for a building so we could at least have an upper figure for the building with hopes of doing better in final negotiations.  On the other hand, there could be dozens of issues facing us in approaching a health permit with estimates ranging from days to weeks and nightmare scenarios that could stretch it into months.  Each of these estimates has its own probability and the final plan is only as accurate as the combined individual estimates.  There really is no accurate plan – just better and worse inaccurate plans.

So one element of risk is the quality of the planning.  How much do we know?  How much research did we do to make them as correct as possible?  Have we been optimistic or pessimistic in our estimates?  Are they realistic?  Did we leave out something significant?

The other big element of risk is in what we haven’t planned for.  There will always be things we didn’t consider.  Will the manager decide to quit on opening day?  Will the new cashier say something rude to the health inspector and get the restaurant shut down before it opens?  Will an earthquake hit the city?  What about fire, flood and pestilence?  And then there are coups and rumours of pig meat being used in our köfte!  The list of potential disasters is limitless and it’s impossible to identify them all.  So the unplanned event needs to have a place on any risk assessment.

But once you’ve got your list of risks written down, what do you do with it?  This is where mitigation comes in.  You can’t eliminate risks, unless of course you abandon the project and climb in a hole.  But you can take steps to minimize the consequences of the risk.  If you have hired a highly qualified chef who is also temperamental, you might want to have a backup chef available just in case your first choice gets angry and walks out.  If an exchange rate shock could put you out of business you may want to look at ways to buy things in different currencies or even to look at forward hedging of currencies.  These would be examples of mitigating risk – either reducing the odds of a bad thing happening or reducing the cost implications if it does happen. 

The secret to making money as an entrepreneur isn’t avoiding risk, but taking intelligent risk and managing it creatively.  Do your homework so you can understand the market, the economy and relevant regulations.  Know exactly what steps are required for the license.  Talk to people about how to hire staff and what to pay them.  Query your accountant about the fees and taxes and then talk to another accountant or consultant to see if those answers make sense.  Do some real market research to see if your product will be accepted – don’t just rely on a few people’s opinions.  Get the facts.  And understand what will work in marketing.  Expensive isn’t always better and doing it the way the guy next door did is a sure means of being mediocre.  Think creatively and talk to your likely customers.

All of these actions lower the real risk to you without impacting your expected returns at all.  At the end of the day it will take more than a bit of courage and a good bit of faith to sell your plan to investors and then step up to make them happen.  Recognize the spiritual aspect of the work – it’s not all materialistic probabilities and we are foolish not to seek God as we prepare for a business like this.  But use the tools and the skills God has provided and don’t rush in where angels fear to tread.