I have this great book I picked up ten or so years ago titledThe Book of Entrepreneurial Wisdom edited by Peter Krass. It is full of short excerpts from some of the greatest entrepreneurs of our time. I pick it up from time to time when I need a bit of inspiration. This time, I turned to the chapter Richard Branson wrote on “Risk Taking.” I have long been a fan of Sir Richard and the approach he takes to life and business. I thought I would summarize the key points he makes. Richard Branson has won on a lot of the bets he has made and lost on a few as well. One thing for sure, he is not afraid to take risks, and he has a strategy for how he goes about it.
Know the Business
Sir Richard believes that the biggest risk you can take is to invest money in a business you do not know. Most of the businesses they have gotten involved with have some relation to the core business they started in. Take Virgin Records which began as an online retailer, then record stores, next record production, that moved into signing acts, on to setting up a music publishing company. This then led to recording and a recording studio, video, distribution and the integration goes on. This is what we know as vertical integration, although he calls it common sense. Listening to your customers and finding new ways to add value is a great approach to vertical integration and a good way to gain wallet/market share. It also increases the chances for success and economy of scale.
“So, behind the Richard Branson ”whizzkid, entrepreneur” – image, there lies – I believe – measured growth from the initial business of mail order through the core of the Virgin Group as it is today.”
Get Involved, Don’t Stand Back
Manage your risk by rolling up your sleeves and personally immersing yourself in the new venture until you get it up and running. This requires you to build a strong team that can run the existing businesses as you dive deep into the new one. Do not depend on others to do the diversification and take the risks, depend on them to do the jobs they know and are good at. I have an example of this in my personal life. When I was running my family business, I researched and invested a half million dollars in new technology to change the way one part of the business made product. I relied on the experts and outside consultants to get the new technology up and running. I was not successful until months later when I completely immersed myself and committed everything I had to making it successful. I remember one of the partners telling me it’s going to take you to make this work, and he was right!
Be Prepared to Fail and Walk Away by Avoiding Psychological Commitments
Avoid commitments and plans that push you to invest to fast. Learn and adjust as you get started. We call this testing the assumptions on your winning moves. The same applies to a startup. Take what you learn and move forward if things look right, but have the courage to walk away or kill the idea if it is not what you thought it was going to be. There are plenty of deals and opportunities in front of you.
Richard Branson tells the story that part of what formed him early on is that when he was four years old, his mother dropped him off a few miles from his home and made him find his way back. This experience was intended - and apparently worked - to make him the independent individual he is.
Limiting the Downside
Set up the structure of a new business with people whose future rests on their performance. This may mean a small salary with a large upside in bonus or ownership options. This keeps people very focused and committed to making the new venture successful. Try to set up the financing so that it does not detract from the established businesses but is based on the assets or performance of the new business. Start small and build as you experience success. Virgin would invest in new artists, but not film, because they could test and see if they made the right decision before committing additional dollars into the project. Jim Collins calls this firing bullets before firing cannons so you can retain your capital while you are in the development stage. Another way to limit the downside is to look for joint ventures with outside investors. There is a very successful group of investors in my home town that consists of ten individuals that are always looking for a piece of the next deal. They are all very successful entrepreneurs but have realized it is easier to take the risk with others than to go it alone. I think it is probably a lot more fun, too!
Plan your escape route at the beginning in the event you do need to exit the new venture. If you realize the investment is not panning out, the worst thing to do is keep burning cash. Set up buy back strategies with equipment vendors at the start with parameters that are beneficial to both parties. Set targets that are a stretch but still realistic. Have the courage to pull the plug and protect your other assets if new business is not panning out. I have seen too many startups bring down the mother ship unnecessarily.
Keep it Small and Keep It Cheap
Limit your overhead and size of the organization. Do not be too fast to build a large team while you are getting started. Look for inexpensive or in-kind office space and have positions that make sense work virtually. Stick to the basics, remember why you are getting into the business and keep in touch with and focused on the customer. As Peter Drucker says, without the customer there is no business. Empower the team you assembled to own the results and give them the opportunity to be true entrepreneurs. Outsource all that you can and focus on the core of what makes the new business unique and valuable to the customer.
The last point Richard Branson makes is “Go for It!” Do not be afraid to take risks and put in the personal energy and commitment needed to be successful.
Good luck and please share your thoughts and learnings, Alan
Photo Credit: iStock by Getty Images
Photo Credit: iStock by Getty Images