Risky business: How to manage risk when betting on your future

When 20-year-old Jason Duong was going into his third-year of commerce at Dalhousie University in Halifax, he had an important decision to make. He was about to begin his second work-term where he had to choose between a job offer that could earn him close to $10,000, or an entrepreneurial co-op that could potentially net him anywhere between negative $10,000 and, well, who knows? 

Before you read on, think about what kind of decision you would make if you were in this position. A cushy nine-to-five job at an established company paying $15 per hour doesn't sound like a bad deal, does it? The steady income would help out with all those pesky expenses like tuition, food, and maybe even a few after-work pints. Needless to say, it's a safe route with very little risk or uncertainty involved.

But what if Mark Zuckerberg, Steve Jobs, or those inventors of Instagram, Kevin Systrom and Michel Krieger, had decided to take the safe route? Where would we be today? Uploading our unfiltered, non-artsy food photos onto our PCs to share on MySpace? That's not a world anyone wants to live in.

Anyway, back to Duong in Halifax. He passed on the job offer, took out a $5,000 loan from Nova Scotia's Students in Business program, and invested $5,000 of his own hard-earned money into a one-year business plan to create a company called Mixtape Apparel: an eco-friendly fashion line that used recycled tape cassettes as belt buckles. Duong launched in November 2010.

There were a lot of risks associated with it, says Duong, now 22. You're putting up money on something that's not guaranteed. You basically have to do your own research, and whatever your research concludes is all you have to act on.

Risk versus uncertainty

For to many people, the idea of taking out a loan, as well as investing your own money into a venture that isn't even 100 percent a sure thing, is downright scary. What if nobody likes your product? What if you embarrass yourself? What if you lose everything? How could the inexperienced Duong be so willing to confront risk so head-on?

Dr. Jeffrey Spence, a psychology professor at the University of Guelph, says you can attribute that to differences in risk-perception, in that certain individuals may have different propensity to engage in risk as they have different perceptions of the consequences. But that doesn't mean that Duong was being reckless. You can make a risky choice, make a risky decision, or engage in risky behaviour, that perhaps was very well thought through, says Spence. 

Sean Wise, author of Wise Words: Lessons in Entrepreneurship and Venture Capital, says most successful entrepreneurs ÔÇÿlook before they leap.'

The myth is that entrepreneurs are huge risk takers, says Wise, who also serves as the industry advisor and online host of CBC's Dragons' Den. But the good ones always mitigate risk with planning and creativity.

Knowing Students in Business would give him one-year to pay back the loan, Duong assessed his options just in case his plan went awry, which included taking out a line of credit to pay back the loan. Before going into it you have to calculate whether you're going to live after the worst-case scenario, he says. You do the best you can to plan for the worst so you have something to fall back on. ... I know the idea of taking out a loan and having to pay it back with another loan is terrifying, but the risk in the grand scheme of things is not that bad. When the alternative is to not do it at all, it puts things in perspective.

Neil Wolff pioneered the entrepreneurship program at Ted Rogers School of Management, the largest of its kind in Canada. He echoes Dr. Spence's notion of risk perception, insisting that risk is all in the eyes of the beholder. After they've done their due diligence and determined what level of sales they need to make this a viable endeavour, and if they still believe they can do it, then are they really taking a risk, asks Wolff. 

Wolff suggests that because risk is measurable and the information is known, the real challenge for entrepreneurs is navigating uncertainty, where information is truly unknown. That's where it takes courage to jump in, says Wolff. That separates the doers and the talkers.

For Duong, he was clearly committed and passionate about his venture, and he wanted to roll the dice and see what happened. As it turned out, Duong had no problem paying back the loan within a year, although it didn't leave him with much profit. If best-case scenario was a 10 and the worst-case was a one, (the outcome) falls in the middle between a four and six, says Duong. The business has gone through many ups and downs, likely due to launch right before the holiday shopping season and on the heels of huge hype from local media, which largely petered out in the New Year. But Mixtape Apparel continues to chug along, and Duong spends about 20 hours per week working on it in addition to his day job. 

I have no regrets, says Duong. I don't know how long it's going to take before I'm fully dedicating my time to (entrepreneurship). But any experience I get, no matter where it falls, is going to be worth it for me.

It's not like jumping off a cliff.

Dave Hale was one helluva industrious kid. Growing up in Ottawa, he earned money cutting grass at Saunders Farm down the street from his house. As he got older, he watched the farm triple in size and eventually become the largest agricultural tourism attraction in North America. After moving into a more creative role, Hale settled in as director of marketing for the company by the time he graduated university. 

 I learned entrepreneurial skills through osmosis, says Hale, who was handling everything from corporate sales, customer relations, and guest experience programs, to direct marketing, advertising, web and digital projects. 

Working with a small budget, Hale turned to digital channels and social media as a way to promote and market the business, partly because it was cost-effective. His solid results helped make a name for himself in Ottawa, and in the span of a year he was matching his salary with cash generated from side projects. For Hale, that was the tipping point that pushed him to start his own firm. September 8th, 2012 marked the second anniversary of the Soshal Group. 

That's the right way to do it, says Wolff, who currently sits on a loan approval committee for the Canadian Youth Business Foundation. Until you build up a market for yourself and you have more certainty that your business project is viable, well, that's the right way of managing risk.

Wolf believes that if a young person really wants to be a great entrepreneur down the road and wants to manage risk, they should follow Hale's example by getting a job working for a big company, and gaining exposure to the systems of managing a complex organization. It's not like jumping off a cliff, he says. You need some skills first ... that discipline will help you build an organization. Ideally, if you can last two to three years working for a big company, that experience would be valuable, says Wolff. Hey, even Kevin Systrom spent two years working at Google before he cofounded Instagram.

Though Hale, now 24, doesn't think it was risky to start his business, he feels the potential risk of growth and expansion. We're getting to a point now that we have enough business in other cities that we could be or should be opening a second office there, he says. 

But Wolff is cautionary about the risk of growing, since entrepreneurs are forced to go back into the investment stage by sinking more resources into hiring more people or taking on another lease. A lot of successful entrepreneurs die at that stage, he says. That's where overconfidence comes into play. 

On the other hand, Hale insists that his company, which currently employs 12 people, needs to keep growing in order to have stability, financial security, and maintain innovation with its clients. It would be foolish not to extend what we've done here to other Canadian cities, he says. 

Ultimately, if Hale wants to increase Soshal Group's upside potential, he doesn't have a choice but to expand. It's like an S-curve, suggests Wolff. You're going backwards, but then the peak of every curve is going to be higher than the last curve.

Don't be a dreamer. Be an executer. 

As much as Monica Mei Chiu dreamed of having her own fashion line, she knew it was going to take a lot of experience before she was ready to launch her own brand. And a bachelor of business administration degree from U of T along with a stint at Ryerson's school of fashion weren't going to cut it for her. She needed to set both short and long-term goals.

Don't be a dreamer, she always said. Be an executer.

Three internships later ' including a marketing and merchandising internship with Armani in New York, a public relations internship in Hong Kong, and a manufacturing and design internship in China ' Chiu felt she had enough well-rounded experience to start applying to business competitions. As you're writing your business plan you gain confidence and momentum, say Chiu, reflecting on her decision to enter Ryerson's Start Me Up competition. You start thinking, ÔÇÿOh yeah, I can do that!'

Chiu failed to make the contest's short list in her first attempt, but the following year she not only found her way on the shortlist, she walked away with the grand prize: $25,000 in start-up capital. Passing up job offers in China, Chiu launched Aime Luxury, a simple and elegant line of women's wear, in 2008. 

Sounds like a dream come true, right? But even Wolff is a tad skeptical. The judges believed that her business had the greatest potential, relative to the other competitors, he says. But just because they validate it doesn't mean it's going to work.

Indeed Chiu still had to face risks and uncertainty along the road, especially having launched at the beginning of the global recession. No matter how thorough her business plan was, it had no way of predicting the U.S. housing crisis and subsequent financial meltdown. As Wolff says, Anything can happen.

I was definitely a debt-collector for a while, she admits. With the economic storm that arose soon after my launch, I changed course as a result in both sales projections and moderated my once ambitious timeline to expand overseas, which I believe saved my business.

Chiu reacted to this setback with courage and confidence, without being cocky. Her flexibility to the global environment helped to minimize the potential downside, while also taking advantage of the situation as a learning experience.

I don't mind having some failure on my profile rather than having not achieved anything at all, says Chiu. The learning and the growth is a payout in itself. 

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