An Opinion by Rodney Manzanga from Aon Hewitt for entrepreneurs

Entrepreneurs come in a variety of flavours, each with its own traits that sets it apart. Among entrepreneurs, a common trait would lead them, when handed a lemon tree, to refuse to settle for lemonade, but to graft an orange tree on it. It’s the quintessence of successful entrepreneurs, which sets them apart when dealing with unique and numerous challenges entrepreneurs face. Entrepreneurial success demands that innovativeness extend beyond the original innovation to strategy, marketing, hiring, risk management, and other aspects of business management. From a risk management perspective, it is vital to think about the spectrum and gravity of potential outcomes and the resources needed to get there: Is the juice worth the squeeze?

Answering that question requires, among other things, open-mindedness. Just as entrepreneurship requires open-mindedness, the management of resultant risks requires open-mindedness. Identifying and addressing emerging risks hinges on the business owner being vigilant and open-minded. Adaptability is key; consequently, risk management systems should be designed to cater for potential risks where the manifestation could be very different from existing ones.

Many entrepreneurial ventures are centred on a single idea—or a couple—which, understandably, the entrepreneur falls in love with. Engrossed with the brainchild, the entrepreneur fights flat out to make that idea work, but usually at the expense of managing key risks (and other important affairs). The potential risks due to love-induced blinkers, as in real life, cannot be understated. In order to have balance and a proper perspective, sentimentality needs to be contained. Some degree of sobriety leads to acceptance of the possibility of failure—there is room for cold and hard business calculus.

Failure of established businesses is, paradoxically, the harsh reality we live with and can’t live without. Failure of start-ups is even more prevalent, an even harsher reality which some entrepreneurs are seemingly oblivious of. Be they “acts of God” or Black Swans, reasons of failure abound. Unfortunately, this risk cannot be eliminated: eliminating it would also eliminate profits. It is, therefore, necessary to manage this risk closely. For example:

Leaders of start-ups and any firm for that matter, must examine potential sources of failure and other material risks and develop robust risk management strategies. This entails looking at causes of failure and near misses within and outside the company, industry, country or region. With an ever-changing risk landscape, heightened vigilance and proactivity are prerequisites for success. Risk management strategies employed should be optimal given the circumstances. At a minimum, one should not invest more than one can afford to lose—failure is a real possibility. Do not sink all your resources into one idea despite your convictions of its strength and chances of success.

Assessing the likelihood of failure or success is increasingly difficult in an unstable business environment. Many entrepreneurs would be forgiven for feeling as if they are stranded in a boat in a storm out at sea receiving knocks from all sides. The nexus of potential threats such as labour relations, the economy, regulations, reputational issues and aggressive competition contributes to the unstable business environment. These challenges can cause an SME to capitulate or catapult it to greater heights, so they need to be managed carefully and globally.  It is necessary to look at the confluence of risks, examining their aggregate impact.  If one only looks at risks singularly, it is nearly impossible to tell the interconnections between risks. A good example that is very pertinent at present is industrial actions and the effect it has when it escalates. Will the stock market be impacted? The Rand? What is the spill-over effect?

SMEs can address unstable risks by being vigilant, open-minded and using the most effective risk management tools, concepts and techniques that will most likely vary from industry to industry.  Talking to experts – both internal and external to the business – particularly Enterprise Risk Management (ERM) Actuaries may prove to be invaluable. Gathering different views may point out an aspect of a given risk that may have been overlooked. Getting independent advice becomes more important with success because political calculations and bootlicking may lead to camouflaging of real issues. Because entrepreneurs rarely suffer from unbridled fear, a healthy dose of fear from an independent voice can bring a balance and help curb reckless decisions.

Entrepreneurs typically have a can-do attitude, the attitude that gives them the fortitude to squeeze king cobra venom to make its anti-venom, turning risks into opportunity. Squeezing the juice—be it orange juice or king cobra venom—always comes at a cost, a cost that needs to be appropriately assessed.