Hi and welcome to today's discussion on risk-taking and entrepreneurial decision
making. Today we're going to take a look at risk
as related to entrepreneurship. What is it that motivates risk-taking by
entrepreneurs? And we'll also work to dispel some of the
myths of entrepreneurship and risk-taking.
And that, we'll look at why entrepreneurs engage in risk and we'll look at a couple
of case studies in that area. We'll also discuss some key ways
entrepreneurs can be more effective in their risk assessment and thereby improve
their decision making. So a central question that I'd like to
start with is why is it that people believe entrepreneurs just simply take
more risk and do entrepreneurs really show any higher natural tendencies of
taking risk versus others that are working within corporate government and
more established settings? And the answer to do entrepreneurs take
more risk in a natural inclination is no. And there is increasing research in the
area that points that entrepreneurs do not by definition have any naturally
higher tendency to take risk. But instead it's perception and it's a
perception of risk that differed. And that there are other motivations in
play that motivate entrepreneurs to start and launch new ventures And one example
of such a risk taker is a gentleman named Elon Musk.
he made his first fortune in Paypal. And when you look at money as a motivator
for entrepreneurship. If that were a motivator, and you were
able to walk away from Paypal with several $100 million after founding the
company. That was subsequently acquired by eBay
after they went public. You could say well, I've made my hundreds
and millions of dollars. And now I can go on vacation.
and that I don't need to take any more risk.
And I don't need to take any financial risk, either.
Elon Musk has done the opposite. He has essentially spent all of his
PayPal income. He, according the New York Times in the
2010 article, declares himself as broke. And you may ask, well what is it that a
centi-millionaire does to find his way into being broke?
And in this scenario, he started multiple other high risk start-ups.
One of those is a company called Tesla. And we will look at Tesla.
One of the vehicles is pictured behind him here.
And this is their factory. I believe this one is the one in Fremont,
California. And they are a emerging electric car
company in the US. not hybrid, but purely electric, in that
these are 100% battery-powered vehicles. And it's helpful to see well what does
it, does this vehicle look like? Is it small, is it compact, is it
unattractive? is it something that is.
Undesirable and for this vehicle you could argue well it's quite the opposite.
it's a very exotic looking vehicle when their initial introduction in the U.S.
Market. the roadster you can see on the lower
left hand side that the performance is among the fastest production vehicles in
the world. And the orientation of the roadster is
that it is essentially a substitute or a direct competitor to the porsches, the
Ferraris, the Lamborghinis,, the lotus, and the other high end vehicles in the
market. And it was priced accordingly.
At a price point of over $100,000. So this was their starting point.
This was something that was positioned as a niche product, serving a niche customer
and they have since gravitated downstream and is serving subsequent markets and
specifically within their Model S, which is a recent Motor Trend Car of the Year.
this is a 4 door sedan. So it has the look and the size of scale
that other full size vehicles would have. And the orientation to this is they
recognize that there is a small market to high end exotic two door $100,000 plus
vehicles. And their entering the passenger car
market. And they are entering as you may expect,
the SUV market that's expected to come to market next year.
so they have built themselves, independent of being associated with any
existing car company, into being their own startup per company in combination
with personal investment of Elon Musk and with subsequent venture investment. the
company was eventually able to go public and they're now are working to grow in
scale in each of these arenas. So not only is Elon Musk a risk taker in
starting an automotive company, in parallel he's starting a space company,
meaning that he is physically building and flying rockets into space with
clients such as NASA, to deploy and maintain satellites and things of that
nature. So two very high risk initiatives to do
one independently, but to do both in parallel I believe is somewhat
unprecedented, all when you look at entrepreneurial ventures.
But this is the type of risk that Elon Musk is taking because he, one is very
interested in the environment, is very motivated by space travel.
And so for him there are these multiple external factors that are in play, other
then just risk for risk sake that makes him very interested and excited about
being involved in these types of ventures.
And as a inventor and as a scientist, he's very attracted to these types of
ventures. So when you look at well what would
motivate a millionaire to invest all of his money and all of his time in these
types of ventures? And what are the risks that he's taking
inherent within that? Well one is certainly understanding how
he may process information and how he and others may make decisions.
And what role do cognitive complexity. And risk propensity take within that.
so in essence, what we see here, is that. As you look at more complex tasks.
And what we mean, again, by cognitive to this thinking elements.
So, as you look at tasks that require more thinking and require more analysis,
there has to be some level of elevated risk, that's being made therein.
And they're working to examine that, and working to try and process that more
effectively. And when we look at strategic decisions,
we don't know the outcomes. It's even difficult to apply
probabilities to these outcomes. But what we do now is that we want to do
more research. We want to have more expertise.
And we want to make as good decisions as we can.
And our ability as entrepreneurs to evaluate risk, to access risk and to
mitigate or lower these levels of uncertainty is certainly central to
making good decisions. And why is that, that we engage in risk
in the first place? Well one is that we may, again not have
all of the necessary information. We may also need to integrate some
insiders view on their perspective We need, need to, in some way, dissect and
understand what happened in the past. But recognize that the past is the past,
and that we want to move forward beyond that.
And that we are optimists. We've talked previously about being
overconfident. But in this scenario, we want to, again,
we expect a favorable outcome. And so that certainly motivates our level
of risk taking as well. Key influencing factors that help us
decide what risks are worth it and what risks aren't worth it, are very much to
the individual. How high are the risks?
Alternatively, how high are the rewards? And we would expect these to move
somewhat in concert with one another. There's a question of consequence, of
well, what happens if the desired outcome isn't the real outcome?
What do we do then? And we'll want to think about to what
extend were the complex elements, the hard decisions factor in their process.
And there are a number of elements that come into play when we go through, when
we think about these relative risk reward scenarios.
What we mean by industry dynamism is essentially what is it that is within the
industry that is forcing change. If we are entering industries, such as
the electric vehicle industry or the space industry and again some of us may,
I expect the majority of us aren't those are very complex, very high risk, the
upside the reward side is. Almost unfathomable, if you can go in and
have success in such a venture as a start up.
Alternatively, the down side is very signifigant.
So we may find that many of us aren't quite facing that level of complexity.
But for the types of interest that we are examining, we want to be sure that we do
the research. That we talk with prospective customers.
That we have a good understanding of the forces in play in that industry.
And not only, where is the industry now, but where is it going?
And how to position ourselves effectively for that.
What we also see is entrepreneurs have the ability to go through and take things
from multiple persp, multiple perspectives.
So think about what is that you as the entrepreneur see as the pros and cons in
the venture. Step out of that and look at a customer
perspective. If you are a customer of your product or
service, what are your motivations, what are your concerns, what are your
apprehensions. Also, look at it from a partner
perspective. Also, look at it from an investor
perspective. So in that way, look at the opportunity
from multiple views. As you begin to look at it broadly you
can began to integrate some of these themes.
And integrate these perspectives. And make sure that the problem, the
solution, the design of the company aligns with that and takes in those
mitigating factors. Also what you can do is take a look at
the cognitive framework involved. And what I mean by that is involve other
people in this process. Also, tie some data to your research.
don't just have a list of personal assumptions and personal views, but see
if you can find some market research, some industry research, articles,
magazines, journals, whatever it is that you have access to that can help you go
through and try to find some evidence that the problem that you think is in the
market, is indeed a real problem. And this should give you a broader and
deeper view of the decision at hand. So, in summary.
We want to recognize that it's not so much entrepreneurs that are naturally
risk taking. But that their tendencies may really be
viewed by what their perceptions are. What they see as risk.
What are their passions? What are the risk and reward of the
different scenarios they may be faced with entrepreneurially?
And that we engage in risks for a variety of reasons.
And those variety are as broad as the number of people that are considering
entrepreneurship. And each of those are unique to the
person. And that it's important for entrepreneurs
and perhaps all you as aspiring entrepreneurs to thoughtfully assess
risk, to put some market research into your decision making, to go through and
work a little bit on the financial. So these are all the types of things that
we'll do later in the course to help you better identify and evaluate
entrepreneurial opportunities. Thank you.