Attitude Toward Risk
For years I’ve heard that Wisconsin has a lower level of entrepreneurship than other states because Wisconsinites are more risk averse. While it may be true that we prefer to keep things cozy and familiar, I’m afraid that analysis only measures first year start-ups against start-ups in other states, and does not measure net business creation (businesses that opened minus businesses that closed) or long-term growth. When you look at net business creation and longevity Wisconsin does not fare nearly as badly.
From the outside it may look like a full time job is more secure than investing your time and assets in a venture that you may control but where the paycheck is uncertain. However these days, it seems no one’s paycheck is secure. In a knowledge economy it may make more sense to take what I know and profit from it myself. But, how do I know I will be around after that fateful first five years in which most new businesses fail?
I’ve come across some information recently that helps me answer that question, both for myself and for my customers. Successful entrepreneurs may not be any less risk averse than the rest of the population, after all. They may simply be better at measuring risk. We all take measured risks every day. We get into our cars and go to work or take the kids to school. We know that people die in car accidents every day, but we determine that our chance of reaching our destination is acceptably high. Entrepreneurship requires the ability to look at both the upside and the downside of business risk and measure the likelihood of getting where you want to go, so to speak.
Attitude Toward Failure and Business Plans
But, how do Entrepreneurs get the information they need to make this determination? One thing that entrepreneurs are better at than non-entrepreneurs is the ability to view failure as a learning experience. Failure is not the end result of an experiment in business, but rather a stepping stone that helps you avoid making the same mistakes in the future.
Another thing that successful Entrepreneurs excel at is planning. According to Scott Shane author of The Illusions of Entrepreneurship and researcher at the Kaufmann Foundation data shows that chances of success are greater if you write a business plan, yet few entrepreneurs do. In a New York Times article Shane speculates about the reasons that more people don’t start with a business plan.
Measured Risk and Information
I’d like to add an additional reason – they really don’t have access to useful information. Ten years ago I had two customers come into the bank in the same week. Both of them wanted to borrow money to open a new retail business. Both of them had extensive work experience in the type of business they wanted to open. One wanted to open a restaurant and the other a retail store. I asked for a business plan from both of them and both of them got it done, because the bank made them.
The prospective restaurateur built his projections based on his knowledge of restaurant turns and restaurant finances. He knew how many meals he would need to serve and how quickly based on the square footage of the location he had in mind. He could make the numbers work on paper, but he really had no idea if there were enough customers that would choose to eat there and generate the turns he needed. All he could do was assure me he would get the word out and get the customers to come.
The retailer was opening a franchise store. Her franchisor supplied her with demographic and traffic pattern data. She chose the location of her store based on comparative demographic data. She also had worked long enough in the business to know how many sales per square foot she would need in any period of time to be successful and she had comparative data to support that she could get those customers in the door.
We never made a start-up loan to the first customer. At the end of the first year in business when the second customer’s note came up for renewal her projections differed from her actual financials by all of a dollar.
I would argue that appetite for risk is not a key characteristic for an entrepreneur, but access to information that helps to measure risk is. What do you think?