An exhaustive study (link opens a PDF) of Norwegian entrepreneurial activity found that common stock investors (used as a measure of risk-tolerance) are about 1.5 times more likely to start a business than non-investors. The trouble is, they're also more likely to perform worse and eventually fail. Stock market participants who start businesses had, on average, 22% lower sales, 27% lower employment, and a 2.55% lower probability of surviving four years than their non-investing peers.
In the beautifully dry summation of the study's findings, the authors said, "All performance measures associate negatively with stock market participation."
What makes risk-seekers worse entrepreneurs, and how can you prevent disaster in your own business?
Why are risk-tolerant entrepreneurs doing so poorly?
Part of the answer could be that the risk tolerant tend to go into riskier lines of business. Indeed, the data show that stock market investors are more likely to go into tech than noninvestors, so there could be something to it.
It might also have something to do with entrepreneurial personality and the way businesses are run as a result. One way to measure this is to look at "sensation seeking" behavior, brilliantly captured in this study by measuring the horsepower and size of entrepreneurs' vehicles (Norway has amazing data).
The researchers found that people with more powerful cars were also more likely to start a business. Being both a powerful-car owner and an investor isn't so great for performance, however. Common stock investors who drive powerful cars experience 43% lower sales, 35% lower employment, and 19% lower survival compared to a matched sample of entrepreneurs who neither invest nor drive such a vehicle.
As an entrepreneur and former owner of a beloved Mustang GT, I gulped when I read this.
All this is to say that perhaps risk-seeking entrepreneurs are more risk-seeking in the businesses they choose and perhaps less inclined to manage their risks well. What to do?
How to manage risk: A primer for the risk-loving
Based on a mix of research and personal experience as an entrepreneur (it was to my great distress that I could very easily check all the boxes for "risk-seeking"), I offer three tips for risk management -- designed especially for those of us who would perhaps typically avoid the subject.
No. 1: Develop a business plan
Business plans don't need to be 100 pages long and filled with charts, they just need to cover the key business areas you intend to tackle and give you a road map for dealing with potential problems. For every basic chapter of the business plan (such as your market, product, customer, competitors, operations, and financial position), think of at least three risks that you might face, then develop some ideas for dealing with them.
Risks could include a competitor beating you to the market, customers not liking your product, or being sued for patent infringement. The individual risks depend, of course, on your business. The key is to identify and prepare for potential problems -- that way, when something does go wrong (it will), you'll at least have a basic idea of how to adapt.
No. 2: Outsource with enthusiasm
There are certain things that each of us hate to do and ignore at all costs. Perhaps it's worse for the sensation-seeking entrepreneur, I don't know. But one thing I've learned the hard way is to suck up the cost and just outsource those things.
For example, I loathe accounting. I realize I could probably become passable at it, but then I'd be learning accounting, which I hate, instead of making sales. This would not be a good use of time.
So, if it's hard to learn, incredibly time-consuming with no upside, or makes you want to stick a fork in your eye, outsource it. This could include everything from accounting to legal advice, design work to filing. It costs a bit in the short run, but it frees up your mind for other things, without the risk of everything falling apart in the interim.
No. 3: Become very risk-averse in the rest of your life
Starting a business is a good time to put your finances and financial planning in order and to mitigate risk wherever possible. If you can, diversify your investment portfolio and refrain from overtrading -- the last thing you need is for everything to go south at once (and with the same magnitude).
If most of your wealth is tied up in your business this won't be so easy, so take a few steps to reduce risk in other ways, like getting appropriate insurance policies and trying to squirrel away some emergency cash. Becoming very conservative about spending, especially during the start-up phase, is also useful. It can be easy to think that the next major sale is just around the corner, only to find yourself in a long-term lull.
Personal health also becomes more important when you're relying on your wits to get by. A moderate lifestyle of eating well, sleeping enough, and exercising regularly can go a long way toward protecting your biggest investment -- the one you've made in yourself -- and keeping the wheels on when things get stressful.
In the end, perhaps the data aren't encouraging for risk-tolerant entrepreneurs, but I'm confident (overconfident?) that with the proper structures in place to help manage potential problems, even the most risk-tolerant among us can be amazingly successful entrepreneurs.
At the very least, it would be really nice to prove those statistics wrong.
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