ENTREPRENEURS AND RISK

One of the long standing clichés amongst management academics is that the study of entrepreneurship is a recent discipline and as the ‘new kid on the block’ should not be assigned the same level of kudos as other areas such as strategy, finance or marketing.

Yet, the fact is that entrepreneurship is actually of one the oldest economic and social phenomena studied and its academic roots can be traced back nearly three hundred years to the early 18th century and the Irish-French economist Richard Cantillon.

In his “Essay on Trade in General” published in the 1730s, he viewed the entrepreneur as someone who not only engages in exchanges for profit but exercises business judgment in the face of uncertainty.

As the entrepreneur operates in an uncertain world, most economists since then have, in one way or another, associated entrepreneurship with the management of risk.

Unfortunately, this view of the entrepreneur as being a high risk-taker has become a caricature, creating a popular picture of entrepreneurs as individuals such as Richard Branson who gamble everything and win (or lose) big.

That is not to say that entrepreneurship is not risky but the perception of risk is very personal and subjective. Indeed, assessing the level of risk depends on how the likelihood of bad and good events happening is perceived and their consequences for the individual and their business.

For entrepreneurs, it is clear there are a number of risks when they decide to go into employment for themselves.

Financial risk is probably the most obvious as the vast majority of new entrepreneurs have to make a monetary sacrifice during the starting stage of the venture that results in a low salary or, in some cases, no income at all in the first few months of a new venture.

In addition, entrepreneurs may need to give away a great amount of personal savings to finance the venture and might not be able to recover them if the business fails.

Then there is the family risk as entrepreneurial activities are energy and time consuming. As a result, the family might be neglected which is emotionally hard for both the entrepreneur and his/her spouse and children.

With most entrepreneurs starting their business between the ages of 35 and 44, many will be taking a big step and leaving a safe well paid job.

They will risk their careers in starting a new business and pursuing their entrepreneurial dreams and the opportunity cost from doing this rather than something else could be significant.

Finally, there is the emotional risk as managing a venture requires a lot of commitments which involve setting aside other aspects of the private life such as family, friends and other personal interests.  In the case of failure of the firm, the entrepreneur’s self confidence is often affected deeply as the failure of the venture is associated to the failure of the entrepreneur’s abilities in running it.

But the one advantage many entrepreneurs have in dealing with such risks is their inherent self-belief to influence the achievement of business goals that the perceived possibility of failure is relatively low.

Whilst others may see such a move as risky, those starting a business may see it as far more preferable than the alternatives.

For example, a redundant worker who uses his severance pay to buy a small shop may feel that although there is a possibility of failure this is outweighed by the prospects of a guaranteed, regular income from a steady and stable business.

And where there is a lack of alternative employment or other sources of income, this could be the best option for the future. In this sense, some people may not feel that they are taking much of a risk in embarking on a new business venture.

And it is often that self-belief that they can determine their own future is what that drives many entrepreneurs to overcome the challenges and risks inherent in starting a new firm and, more importantly, minimizing as much uncertainty as possible around their business.

Whilst they are driven by opportunities in the marketplace, they are not just reckless gamblers who don’t know what they are doing. Instead, they calculate the odds for or against a particular course of action and take a decision that will look to maximise positive outcomes if successful and to minimise negative outcomes if unsuccessful.

In the words of the great country singer Kenny Rogers they are those  “who know when to hold 'em. Know when to fold 'em. Know when to walk away. And know when to run”.

Therefore, nearly three hundred years after Cantillon’s seminal work in recognizing, for the first time, the characteristics of entrepreneurial individuals, today’s entrepreneur still exercises business judgment in the face of uncertainty by taking calculated risks to succeed in business. In doing so, they not only are building sustainable ventures for the future but are boosting the economy at the same time.

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