In Part 1, I highlighted the four categories the FAA outlines risk: pilot, aircraft, environment, and external pressures. Let’s dive into the parallels with entrepreneurship and what we can learn from it.
Entrepreneurs who burn the candle at both ends become the source of risk. This is not about the always essential “hard work.” Risk is created when decision-making abilities are compromised. In a world of fierce competition, it is often critical to push ourselves and our teams to the limit. However, as we do this, we are increasing our risks. Good pilots avoid flying when their judgement is impaired. In 2018, Elon Musk, the high-flying founder of Paypal, Tesla and SpaceX, pushed himself to the point of being impaired. “This past year has been the most difficult and painful year of my career,” he said. “It was excruciating.” No one can question his genius, but his decision to push himself to exhaustion led to the creation of unnecessary risks: unfounded claims of taking the company private and causing mistrust in the market by appearing drunk while smoking a marijuana joint — all pointless, fabricated risks.
Entrepreneurial risks are often catalyzed by the entrepreneurs, themselves.
In the early 1990s, my partner, Dan Straub, and I were commissioned by the Administrative Offices of the Courts (AOC) of California and Chief Justice George to help the courts plan for a massive consolidation of Superior and Municipal Courts of California — going from over 200 independent entities to 58. We built a number of tools and methods to help re-engineer processes and streamline the staffing and budgeting activities. Tools that turned into a software called RAM (Resource Allocation Model). I proposed the software solution to one of the Court CEO’s and suggested for them to hire software developers to code it. The client insisted that my firm should build it for them, despite my persistence that we are not a software company! Eventually I agreed and called my partner to let him know of our planned journey into software development and the technology world. He immediately commented, “You always take off with the plane before building the landing gears.” This notion has stayed with me for close to 30 years. Obviously, the approach creates risk. However, I have learned that market timing, funding limitations, and customer expectations sometimes demand it. To take off without the landing gear suggests that the entrepreneur has assessed the probability of success — designing, building, and installing the proper landing apparatus while in flight — and has a plan to deliver tangible results and navigate around the execution risks. It also signals a degree of confidence in his/her ecosystem (employees, partners, etc.).
In a conversation with an aspiring and extremely competent entrepreneur who was looking for funding, I was reminded that entrepreneurs often must take off without the landing gear. She had raised somewhere close to $2.0 million for her venture some months ago, but was waiting to start the full force execution by hiring people and initiating some external tests. She was waiting until she got another $500k and secured an 18-month run rate. She was waiting for all the parts of the plane to be constructed and tested before gaining enough confidence to start the journey. This is wrong! It is planning on evading risk and expecting certainty. Entrepreneurs don’t duck for cover when faced with uncertainty; they mitigate the risks — avoidance is for harbor seekers!
The Entity: The Aircraft
The companies built by entrepreneurs are the vessels that hold the ability to turn a vision into a product, a service offering and a business. Every company is glued together by its processes and technology, its people and culture, and its strategy and mission. At every connection point, risk is concealed. Processes can break, technologies can malfunction, security can be breached, people can be dismayed, and customers disheartened. There is always a probability of occurrence. To be able to mitigate the risks, the entrepreneur (the pilot) must be aware of them all. Create KPI’s (Key Performance Indicators) at critical execution steps and rely on technology to inform you on anomalies pointing to risk.
Just as a pilot relies on the instrumentation in the cockpit, an entrepreneur must build systems and process that make him aware of changes and trends that may point to possible risk ahead.
The Economy, The Market & The Competition: The Environment
Our competitive world is a multidimensional chess game with risk hiding in every layer generated by each pawn, rook, knight, bishop, queen and king: the economy, the constantly changing customer expectations, technology advances, innovation from across the globe, trade wars, and more. These risks have been the domain of an entrepreneur forever. They are mostly known and explored by skillful MBA’s. The soybean farmers affected by the Chinese trade war, i-Phone losing market share to Samsung’s Android, and Delta, American and United Airlines looking victorious (at least for now) after bloody price wars — all risks induced by the environment. The environment that entrepreneurs and their companies live in is uncertain and infested with risk. Those who are always aware of their environment and master dynamic mitigation position themselves to win.
The economy, market and competition risks are never 100% known or contained!
The Stakeholders: The External Pressure
Two newly minted entrepreneurs reached out to me for capital. Their pitch was that they had solved a big problem for small retail business owners, particularly restaurants — they were building a platform they could use to promote their offers and specials and manage their reviews (eliminate bad ones). They were three successful partners: an executive at Google, a management consultant with direct market experience, and a technology expert in agile development; they were invested and had put in $15,000 and were looking for $5,000,000 more — so that they could quit their jobs and focus on family obligations. First, in this day and age, $15k for three high level executives is not being committed to the cause or sharing the risk. Second, you cannot shift the risk to investors because you have families and obligations — you can mitigate the risk, but not unload on someone else. Asking for a $5 mil valuation for a company with a first draft app with no active customers is simply unreasonable.
To be an entrepreneur is to be prepared to expose your family to financial risk. You will also pressure the family bonds constantly. You should also realize that the objective of getting investors is not only to reduce your risk but to increase the probability of your company’s success — by taking money from investors you have not eliminated your risk, but exposed yourself to a different set of challenges around execution and timing imposed by them. External pressures also extend themselves to other parts of your ecosystem. Your employees are your key stakeholders. They can get sick, get tired, and quit — risk, risk, and risk. Your intellectual property can be compromised and your process know-how can become irrelevant in the face of innovation.
Ignore the external pressure and you are exposed!
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This is a condensed version of the original article that may appear in Sid’s next book.