Recently I had a forum discussion with a group of really smart MBA students where we talked about starting companies. The students were armed with a few years of great business education yet couldn’t answer one particular question: How do entrepreneurs evaluate risk before starting a company?
My answer: We don’t, we just take it on.
At first everyone waited for the punch line. They assumed that great companies were the result of a tremendous amount of research and planning, like writing a term paper or a thesis. The idea of running into the business world with your guns blazing was totally heretical.
Yet the truth is, that’s pretty much how starting a company works. Entrepreneurs don’t decide to start companies as the result of market research, perfect planning and business analysis. That’s what MBA’s do in the theoretical world of business. The rest of us just jump in and kick some butt.
Reports are for Academics
Successful companies aren’t built on comprehensive market reports. They are built through competent execution delivering useful products. The problem with reports is while they may show how big a market is or how much a customer is willing to pay, they can’t tell you whether you’ll be successful.
An entrepreneur’s risk isn’t about whether the company can achieve a $1 billion market cap within ten years. It’s about proving if a company can achieve $50,000 in sales within the first six months.
Academics can get by on reports alone because they never have to actually execute on these plans. Entrepreneurs don’t have time to build reports because they are too busy trying to get that first $50,000 in the door.
You don’t Evaluate Passion
Many great companies are founded from a simple passion for doing something well, not out of a well-identified market opportunity. I founded Blue Diesel, a web development company, because I was enamored by the idea of building Internet technology. In fact, I didn’t even realize I was building a company – I just loved what I was doing.
When entrepreneurs get excited about an idea and wrapped in passion, they don’t stop to evaluate their passion – they don’t have to. They are so busy doing what they love that building a company or validating a market seems secondary.
Numbers Lie
MBA’s also rely on numbers to tell a story, but numbers are like people. If you torture them long enough they’ll tell you anything you want to hear!
Beyond that, numbers lie. They lie when you use hopeful (and incomplete) predictions like “if we only capture 1% of this market we’ll be a $100 million company!”
They conveniently overlook the fact that getting to a $100 million in revenues has nothing to do with being able to capture 1% of a market. It has to do with being able to capture $100 million in sales which is really hard to do, regardless of what percentage of the market it represents.
Risk isn’t a Report
Even if you could find a fancy way to quantify risk into a simple spreadsheet it wouldn’t matter. No grade that you’ll extract or answer that you’ll find will change the simple fact that risk is an emotional problem, not a numeric one.
When you’re lying in bed at 3 a.m. staring at the ceiling wondering how you’re going to make payroll, your fancy risk analysis tools aren’t going to help put you to sleep. No matter what those numbers told you, the only thing on your mind will be the anxiety of risk.
If you think that you’ll be able to analyze yourself out of this situation, think again. Every entrepreneur, even the most successful ones, has had to deal with the gut-wrenching insecurity of taking on a risky endeavor.
When MBA’s ask about analyzing risk, what they often mean is “can we find a situation that will minimize the anxiety and emotion of doing something risky?” Unfortunately the answer is “No”, which is why every new company, no matter how well planned, is overwhelmed with anxiety in it’s formative stages.
Forget Analysis, Just Do It
Perhaps you’re an MBA that’s analyzing the risk of your next undertaking. My guess is that you’ll be able to spend enough time and thought to come up with a reason why your plan will work. Or perhaps you’ll ditch the plan based on your analysis only to find some other hack made it successful with no planning whatsoever.
My advice would be to forget the analysis altogether and just do it. You’ll learn more in the first six months of piloting your new company than you’ll learn through years of analysis and research.
If you want to be a great academic MBA then by all means, stick to your research. If you want to be an entrepreneur, drop the analysis and just go start a company. It’s probably cheaper than your MBA anyhow.