What are the hidden risks of entrepreneurship?
I recently had the chance to speak before the energetic and engaged crowd of Arlington Women Entrepreneurs, hosted at Trade Roots in Arlington, Virginia. I promised resources for those in attendance, and this post follows through on that commitment. During my talk, I touched on four hidden risks of entrepreneurship: awareness risk, key personnel risk, connection risk, and reputation risk.
Synopsis. No informal presentation can address all the risks faced by a growing organization, so my talk followed a simple mindmap:
The core message is that even new entrepreneurs and small startup teams need risk management. As we have previously explained, humans individually don’t perceive risk very effectively, and we don’t like to admit we’re wrong. And as founders know better than anyone else, we are far too busy to pay attention to things unless we have systems for bringing them to our attention. That’s what risk management is all about: organizations commit to a process of gathering credible information from a variety of sources so that they identify and address threats and opportunities as a matter of routine.
Entrepreneurs face many different threats and opportunities, and many of those risks are unique to their circumstances. At the AWE meeting, we didn’t try to address those niche risks. Nor did we focus on the risks every entrepreneur knows — the importance of cash flow, the worries that come from having too much business concentrated in too few customers or offerings, the need for marketing (which almost every startup shortchanges), and the need to recruit, train, and develop powerful teams. Instead, we discussed four risks that often escape a busy entrepreneur’s attention.
Awareness Risk. The best thing about entrepreneurs is that we are willing to take risks. The worst thing is that we often take risks of which we are not even aware. We also miss opportunities because we are concentrating too much on immediate crises. Risk management can help make awareness, follow-through, and accountability matters of routine. Solid resources for building awareness include the following:
- This post about performing a risk inventory. The point of a risk inventory is to tap into your own resources to identify threats and opportunities.
- This post about creating a risk register, which is designed to prioritize threats and opportunities and assign responsibilities within your team.
Key Personnel Risk. Entrepreneurs too often build companies that depend on the skills of key personnel. “It is literally impossible to produce a consistent result in a business that depends on extraordinary people. No business can do it for long. And no extraordinary business tries to!” Michael Gerber, The E-Myth Revisited at 102 (Harper Business 1995).
The best entrepreneurs recognize that this principle extends to themselves. “If you founded and built your own company, you undoubtedly are the most visionary, experienced, and skilled person on your entire staff. But if your company depends on you for survival, it is not worth very much without you, and there is no way you can exit.” Richard G. Stieglitz and Stuart H. Sorkin, Expensive Money Mistakes When Buying & Selling Companies (2010), at 30. Even if your company depends on you as a core service provider, at least some portion of your daily activities can be assigned, delegated, or out-sourced to others.
The resources I suggest for the entrepreneur on key personnel risk include these books:
- Traction, by Gino Wickman. Wickman provides a great number of tools for creating systems that work within your growing organization.
- The E-Myth Revisited, by Michael Gerber. Gerber emphasizes that every founder should start from the principle that she is building Franchise Number One of a potentially franchisable business. If you do so, you will create routines and processes that simplify and take key personnel out of the growth equation.
- Scaling Up, by Verne Harnish. This book is for companies in the growth stage, but the lessons are equally applicable to earlier-stage startups. Like Wickman, Harnish emphasizes creating systems that facilitate growth and promote accountability.
Connection Risk. Entrepreneurs are often so busy working in their business and on their business that they fail to reach out and establish connections. Without a rich network of connections, however, an entrepreneur will develop tunnel vision. Furthermore, we never know where our next threat or opportunity will be; therefore, we need to have friends and acquaintances in a variety of disciplines. This means that a network must be broad and must include people of very different background and experiences.
During my AWE presentation, I suggested a few resources:
- This brief article describes a simple methodology for mindfully growing your network and holding yourself accountable for its growth over time.
- Endless Referrals, by Bob Burg, emphasizes a “go-giver” approach to making connections, focusing on what you can do for other people.
- Book Yourself Solid, by Michael Port, identifies the many channels through which one can build and enhance connections.
Reputation Risk. To paraphrase Warren Buffett, it takes years to create a favorable reputation and just a few minutes to ruin one. Every entrepreneur should strive to be a trusted resource for his or her customers. The book I suggest for this purpose was written for lawyers and other professionals, but applies equally for anyone who wants to be reliable:
- The Trusted Advisor, by David Maister et al.
Conclusion. Let us know if you found these resources useful. If you know of other resources on these topics, please provide them in the comments. As always, if you found this content useful, please share it with others.