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Start-ups are full of all sorts of risks

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Conventional wisdom tells us that entrepreneurs, by their nature, are risk-takers.

We know that entrepreneurs trade the security of a weekly paycheck for freedom from regular office hours in hopes of finding entrepreneurial "El Dorado." We know that entrepreneurs accept uncertainty and ambiguity in exchange for the independence to pursue their creative dreams without being constrained by rigid policies and procedures.

To better understand the concept of risk, think for a moment of going to Las Vegas and watching two different men placing their entire savings on the same bet at the roulette wheel. One is a single 22-year-old college dropout who has never had significant income or major financial obligations. The other is a well-respected, 45-year-old father of three teenagers whose sights are set on an Ivy League education for his children.

The second man is obviously taking a greater risk because he may lose his life's savings, future security for himself and for his family and his sterling reputation. He also has limited time left in his career to recover from this folly. The 22-year-old might view this venture as nothing more than a game since he has virtually nothing to lose.

With this is mind, it is not surprising that most of the entrepreneurs that you read about in the newspaper and national magazines are young men and women rather than middle-aged professionals. Often, the 22-year-old entrepreneur's first real exposure to risk doesn't occur until after his start-up is a resounding success.

At this point, he has a great income, and his net worth is more than he ever dreamed of, and he has an exciting life style. He knows that he can continue basking in the success of his small business or he can re-invest (risk) it all to grow his dream into a truly major corporation.

There are few entrepreneurs who have the passion and the long-term commitment to continue re-investing to build an empire. Rather than exposing themselves to constant risk, most are content to continue as the executive of a small business.

Now let's consider a different perspective of risk. At first glance, it appears that entrepreneurs routinely expose only themselves to great risk to achieve personal independence and financial wealth.

However, the successful entrepreneur who has been involved in multiple start-ups knows that his success is dependent upon many different people accepting personal exposure to significant loss. He knows that all will go well if this risk is managed carefully and if it is spread around in an equitable manner among his investors, his employees, his customers and even his suppliers.

Often, employees who are sold on a wonderful new idea for a product or a service will work for meager salaries without employee benefits in hopes that they will be rewarded when the business is sold or when it goes through an IPO.

In many of these businesses, the biggest risk is the customers. The revenue from early customers is actually financing the start-up. And the customers' risk is more than just the amount of money that they're spending for the product or service. They are also spending time, and they are exposed to unspecified recovery costs if your business fails. Their business may be at risk if they are dependent upon your product or service.

Similarly, the new venture's suppliers are also at risk if you are unable to meet the significant financial obligations of your start-up.

Every prospective entrepreneur needs to analyze his personal circumstances and then consider the risks that will be placed upon himself and upon his associates to assure that he has a sustainable business plan with appropriate rewards for all involved.

David M. Brown is associated with the BYU Center for Entrepreneurship. He can be contacted via e-mail at cfe@byu.edu.