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 four 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 eventual ly 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
wanna do more research. We wanna 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 wanna 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. A nd 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.