Not a Risk Taker? Don't Fret. Neither Are Most Entrepreneurs | BNET
Big-time entrepreneurs almost always look like big-time risk takers. Yet nothing could be further from the truth. While plenty go to great lengths to make their ventures succeed, spending their savings or going into debt to pursue their dream, they also tend to up their odds by systematically lowering their risks. “The experienced entrepreneurs learn that gambling is not the way to build a business,” says Saras Sarasvathy, a professor of entrepreneurship at the University of Virginia’s Darden School. In fact, when it comes to attacking problems — especially high-stakes decisions — the best entrepreneurs are downright conservative.
Take Leonard Shoen, the founder of U-Haul. Shoen had $5,000 to work with when, in 1945, he decided to launch a business renting trailers both in-town and one-way across the country. That was a fair amount for the time, but Shoen spent nearly all of it just buying and fixing up trailers he needed to get started around his home in Washington State. The problem was that for his plan to work, Shoen needed hundreds of trailers stationed across the country — a notion that looked foolish with that much money and no proven market.
But Shoen got creative as he went about figuring out ways to expand. To solve the problem of distributing the trucks across the country, he let the first wave of renters take the trailers for practically nothing on the agreement that they would establish franchise rental locations wherever they were going. He bought more trailers, but he sold them to employees, family members, friends, and investors who would then lease them back to Shoen’s company. That way the owners, not Shoen, were responsible for upkeep. Then, to set up the rental locations, Shoen leased unused parking spaces at gas stations and he then enlisted the station owners to manage the rental paperwork, making them partners in the business.
It was strategically brilliant. Shoen had put himself in the best possible spot by spreading the risk across so many people in so many locations. Had the whole thing flopped, Shoen would have been out his time and roughly the $5,000 he started with — money that Shoen decided up front he was willing to risk.
As a case study, U-Haul baffles business school students. Sarasvathy says that when she asks her students to write a business plan for U-Haul, despite knowing that the business is successful today, most of them conclude it’s just not feasible. The business requires the entrepreneur to sink too much money into assets that quickly lose their value, and there’s little that would prevent a wealthier competitor from swooping in and building the business better and faster. Even worse, at the time there was little proof that there was much of market. (Shoen determined there was a need after he tried to rent a trailer to move his belongings from Los Angeles to Portland, Ore. No one would rent him one — not exactly the kind of market research outside investors like to see).
The lessons Shoen’s story offers, Sarasvathy says, are valuable for anyone eager to make their venture work. Like many successful entrepreneurs, Shoen began by coming up with an amount of money he was willing to lose — something Sarasvathy calls the “affordable-loss principle.” It’s a simple but powerful concept, and certainly not the mark of a shoot-for-the-moon risk taker type. “By settling the question of what you’re willing to lose, you play the game more conservatively than it at first seems,” says Sarasvathy. “And you end up investing less than if you were blindly focused on the upside.”
Doing this is psychologically helpful as well, she says. When you identify the worst-case scenario — in Shoen’s case, losing $5,000 — you gain a certain amount of control in an otherwise uncertain situation. You can, after all, control how much you are willing to lose. It’s a key reason that most entrepreneurs — especially in this economy — argue that working for themselves is far less risky than working for a big company. To a large extent, they’re controlling their own destiny, and that makes life a lot less uncertain.
(U-Haul trailer photo courtesy of Flickr/Bravo Six Niner Delta, CC 2.0.)
