One thing I’ve learned along my entrepreneurial journey is that business is evolutionary. Risk in particular, never really goes away. In just evolves and takes new and different forms. To understand the evolutionary nature of risk is to understand the lifecycle of your business. Good leaders understand the how risk changes and can focus their skills and efforts accordingly.
While there are an infinite number of different risk phases that business will go through over the course of its life, I think that there are three main “epochs” to which every business owner can relate. Each has its set of challenges and opportunities, and it’s incredibly important for entrepreneurs to recognize where they stand about them.
Existential Risk
The first risk epoch is existential in nature. This occurs during the early stages of business when entrepreneurs have to prove out the viability of their product or service. During this period, the primary focus of the business is the determination of whether or not your product is desired, valued, and functional.
The period of existential risk is where most businesses fail. It takes a lot of hard work, perseverance, and luck to survive. Businesses at this stage are pre-revenue and incur a lot of startup costs. Investors who choose to participate at this stage shoulder a good deal of risk, and as a result generally take a much larger portion of the equity. Entrepreneurs in this phase of the business have to remain mindful of the unproven nature of their creation and act with the appropriate level of humility and caution.
Execution Risk
If there is one mistake that I’ve seen many entrepreneurs make time and time again, it’s harboring the false assumption that existential risk is the only risk that matters. While the need to prove out a concept’s viability is obvious, it is by no means the end-all-be-all.
The second epoch is characterized by execution risk, in which businesses work to scale the what they’ve created. This is where the entrepreneurs are separated from the operators. Some people revel in creating something from nothing and have less interest in actually running a business. Those types of entrepreneurs tend to struggle during the execution phase of the business.
Sustainability Risk
The third, and arguably most difficult “risk epoch” is all about maintaining the viability of the business you’ve created. This is the point where the sins of the past come to the surface, and seemingly solid companies can collapse with little warning.
Before founding BodeTree, I worked at the Apollo Education Group. Apollo owns and operates institutions in the for-profit education space, and recently experienced a fairly dramatic collapse. After years of hyper-growth, fantastic margins, and industry-defining advances, the University of Phoenix (Apollo’s flagship institution) is being sold to a group of investors for a mere $1.1 billion dollars. The reasons for Apollo’s fall is all too common: hubris and greed.
In attempt to keep growth rolling at the pace investors had become accustomed to, the organization pursued strategies and avenues that were ill-advised at best and unethical at worst. In short, they failed to ensure that the business had a stable and sustainable future, leading to the organization’s eventual collapse.
Like most things in life, business risk is both nuanced and evolutionary. Entrepreneurs and business leaders need to recognize this fact and understand what phase they find themselves in. The best leaders are the ones who can successfully evolve alongside their company and guide it to success.