What are the main risk and the main reward facing entrepreneurs in the free enterprise system?

Do you dream of starting a business? If you have the entrepreneurial spirit, you probably have some pretty big ideas of how you want your business to work, and where you see yourself in five or ten years. Having big dreams and goals is key to finding success in entrepreneurship; while there is a balance between being realistic and going after large goals, most entrepreneurs will tell you that you have to be willing to dream big and take huge risks to see your business take off. This does mean sometimes you will fail, but as an entrepreneur, failure is just part of the deal.

There are many famous examples of entrepreneurs who took huge risks when starting a business. While not everyone can turn their entrepreneurial dreams into something as huge as Facebook, learning from these famous examples will help everyone understand how risk factors into starting any type of business in any industry.

Mark Zuckerberg took on huge risks to create the Facebook, including dropping out of college, moving his business to busy and booming Silicon Valley, turning down buyout offers, and running the business the best he possibly could through his 20’s. Mark Zuckerberg still takes technology and marketing risks to further his business ideas, and sometimes they don’t pan out. In 2014, Zuckerberg invested heavily in a virtual reality platform called Oculus. While the platform still exists, it didn’t generate the buzz with Facebook users that it needed to generate revenue. While some called this a Zuckerberg mistake, the reality is that these huge risks are crucial to furthering a company and maintaining the entrepreneurial spirit needed to find success in business.

Elon Musk has faced plenty of ups and downs as he has worked to create Tesla. His huge risks have included putting up his own money to keep the company afloat, borrowing money from friends to pay his own rent, and being willing to buck traditional business practices to keep production working (many Tesla employees have done their fair share of time in the production factory, no matter where they were hired to work.) These huge risks, and the ongoing risks Elon Musk takes to keep building Tesla, have turned his net worth to over $16 million. As an added note, as of October 1st, 2018,  Musk has stepped down as chairman of Tesla amid fraud charges dealing with a Tweet about making Tesla public. It will be interesting to see where these continual risky moves take the company, and him.

Richard Branson took a gigantic risk with the Sex Pistols in the 70’s, taking marketing efforts to an extreme by trolling the Queen of England’s silver jubilee event with a controversial song about the monarchy. This stunt went down in music history, and helped Branson build his record label to welcome other huge artists like The Rolling Stones, Tina Turner, and Mariah Carey. Had he been unwilling to take the giant risk, and face the reality that it could fail and get him into huge trouble, Branson wouldn’t be where he is today. He continues to take risks with investments, appearances, shows, and more, proving that his entrepreneurial spirit is still alive and well.

While risk is crucial to entrepreneurship, the reality is that it’s not just taking huge leaps without considering the options that makes businesses work. Calculated risks are what make businesses succeed. The big difference between just taking a risk, and taking a calculated risk is the consideration that goes into it. Risk-takers don’t think about the escape route, the factors that make it risky, and what the situation will be if they fail. Entrepreneurs take calculated risks; they’re willing to “go big or go home” but they understand the consequences if they fail and have taken into account the likelihood that they’ll succeed.

There are five kinds of risk that entrepreneurs take as they begin starting their business. Those risks are: founder risk, product risk, market risk, competition risk, and sales execution risk.

• Founder risk considers who the founders of the company are, if they get along, and how they will work for the company.
• Product risk takes into account the engineers creating new product for the business and how they will recruit other product engineers.
• Market risk looks at the problem you’re solving with your product and how consumers will react.
• Competition risk looks at how you differ from other similar organizations and companies.
• Sales execution risk helps you look at how to sell your product to consumers by presenting them a solution to their problem.

All of these risks are crucial elements to preparing to start your own business. Being an entrepreneur means being willing to take a look at these risks, and decide if this calculated risk looks like a good idea for your organization. Then, being willing to take the leap.

In addition to being willing to take risks, the personality of entrepreneurs and risk-takers is crucial to the outcome of risk-taking. New studies indicate that optimism or positive feelings about luck and ability help risk-takers succeed. The more lucky a risk-taker believes they are, or the more they have optimism and confidence in their skills and abilities, the more likely they are to overcome the challenges associated with the risk they are taking.

Beyond calculated risk-taking, entrepreneurs can greatly benefit from a business education. Learning about finances, marketing, sales, and accounting can all help budding entrepreneurs get some of the savvy needed to understand how things work in the business world. A bachelor’s degree in business can be an ideal place to start learning about all the elements of business. After receiving a business bachelor’s degree, a master’s degree or MBA can be a good option to continue that business education. Entrepreneurs can greatly benefit from learning as much as possible from a university like WGU, and mixing their education with the ability to take calculated risks can be a recipe for success.

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Most entrepreneurs are risk-takers by nature, or at minimum calculated visionaries with a clear plan of action to launch a new product or service to fill a gap in the industry. On a personal level, many entrepreneurs take big risks to leave stable jobs to throw their efforts (and sometimes their own money) into launching a business.

For entrepreneurs, there is no guaranteed monthly income, no guarantee of success, and spending time with family and friends can be a challenge in the early days of launching a company. Here are some of the most common risks that every entrepreneur and investor should evaluate and minimize before starting a business.

• Entrepreneurs face multiple risks such as bankruptcy, financial risk, competitive risks, environmental risks, reputational risks, and political and economic risks.
• Entrepreneurs must plan wisely in terms of budgeting and show investors that they are considering risks by creating a realistic business plan.
• Entrepreneurs should also consider technology changes as a risk factor.
• Market demand is unpredictable as consumer trends can change rapidly, creating problems for entrepreneurs.

An entrepreneur will need funds to launch a business either in the form of loans from investors, their own savings, or funds from family. The founder will have to put their own "skin in the game." Any new business should have a financial plan within the overall business plan showing income projections, how much cash will be required to break even, and the expected return for investors in the first five-year timeframe. Failure to accurately plan could mean that the entrepreneur risks bankruptcy, and investors get nothing.

Entrepreneurs face many risks when they launch a venture, and they should take measures to insure against those that are most likely to affect them.

An impressive business plan will appeal to investors. However, we live in a dynamic and fast-paced world where strategies can become outdated quickly. Changes in the market or the business environment can mean that a chosen strategy is the wrong one, and a company might struggle to reach its benchmarks and key performance indicators (KPIs). 

New technologies are constantly emerging, particularly in the era of the Fourth Industrial Revolution. Some of these changes are characterized as "paradigm shifts" or "disruptive" technologies. To be competitive, a new company may have to invest heavily in new systems and processes, which could drastically affect the bottom line.

Many factors can affect the market for a product or service. The ups and downs of the economy and new market trends pose a risk to new businesses, and a certain product might be popular one year but not the next. For example, if the economy slumps, people are less inclined to buy luxury products or nonessentials. If a competitor launches a similar product at a lower price, the competitor might steal market share. Entrepreneurs should perform a market analysis that assesses market factors, the demand for a product or service, and customer behavior.

An entrepreneur should always be aware of its competitors. If there are no competitors at all, this could indicate that there is no demand for a product. If there are a few larger competitors, the market might be saturated, or, the company might struggle to compete. Additionally, entrepreneurs with new ideas and innovations should protect intellectual property by seeking patents to protect themselves from competitors.

A business's reputation is everything, and this can be particularly so when a new business is launched and customers have preconceived expectations. If a new company disappoints consumers in the initial stages, it may never gain traction. Social media plays a huge role in business reputation and word-of-mouth marketing. One tweet or negative post from a disgruntled customer can lead to huge losses in revenue. Reputational risk can be managed with a strategy that communicates product information and builds relationships with consumers and other stakeholders.

Some things cannot be controlled by a good business plan or the right insurance. Earthquakes, tornadoes, hurricanes, wars, and recessions are all risks that companies and new entrepreneurs may face. There may be a strong market for a product in an under-developed country, but these countries can be unstable and unsafe, or logistics, tax rates, or tariffs might make trade difficult depending on the political climate at any point in time.

Also, some business sectors have historically high failure rates, and entrepreneurs in these sectors may find it difficult to find investors. These sectors include food service, retail, and consulting.

The percentage of small businesses launched in 2018 that made it to their third year, according to the Bureau of Labor Statistics.

The U.S. Bureau of Labor Statistics found that of the small businesses that were started in 2018, 81.3% made it to their second year (2019), and 65.4% made it to the third year (2020). Entrepreneurs should expect to make some mistakes, some of which will be costly. However, with the right planning, funding, and flexibility, businesses have a better chance of succeeding.