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Game of Risk

If you see the words "caution" or "careful" in your entrepreneurial rulebook, you're reading it wrong.
April 1, 2002
URL: http://www.entrepreneur.com/article/49792

Look both ways before you cross the street.

That's the first rule, and the others we also know all too well. Don't take candy from strangers. Don't swim for an hour after eating. Careful what you touch in the woods. Wear a bicycle helmet. If you're lost, find a policeman. Fasten your seatbelt. Don't play with matches.

Don't take risks.

All good rules, of course, but most parents know to tell their little startups that rules are sometimes meant to be broken, or at least bent. Yes, that smiling child with the missing tooth at the playground is a stranger, but he's harmless. Making a snow angel could result in the sniffles, but let's do it anyway. Sure, after your bike's training wheels are removed, you might fall; but then again, you might not.

Not taking a risk is taking a risk.

Starting a business is a risk in itself, but in a way, getting a new company off the ground is the easy part. If you started with little, you had little to lose. But once you have employees-whether it's five or 500-what you do or don't do may affect the lives of them and their loved ones. You have customers. Suppliers. A reputation. A bottom line that, if not cared for, could lead you back to the bottom. Take a risk now, and everybody may suffer the consequences.

Or reap the rewards.

We talked to three entrepreneurs who embrace risk even more than your average business owner does-taking leaps when the economy is sour, betting on unproven businesses and trusting their guts for all their major decisions. Take a look-if you can stomach it.

Go for Broke

There are countless entrepreneurs taking enormous risks every day. But let's begin with Ramin Kamfar, 38, who last year grew his Eaton, New Jersey-based company, New World Coffee-Manhattan Bagel Inc., from a robust $40 million-dollar business into a $400 million one, which makes it the nation's largest bagel bakery chain, according to The Industry Standard magazine.

Kamfar has accomplished this by taking what many entrepreneurs would consider a major risk, particularly these days: New World spent $160 million to buy a bankrupt company, Einstein/Noah Bagel Corp., which was in debt to the tune of $30 million. In fact, over the years, Kamfar's company has made a habit of buying bankrupt bagel chains, including Manhattan Bagel Co., Chesapeake Bagel Bakery, New York Bagel Enterprises Inc. and its subsidiary Lots a' Bagels. Kamfar often says he wants to become "the Starbucks of the bagel industry."

But ask Kamfar about the risks of buying up bankrupt bagel chains, and he doesn't see it as dangerous. "Risk is part of any business, and it's inherent in any job, whether you're an entrepreneur or a midlevel manager," says Kamfar. "The trick is to learn to manage that risk and to make sure that all risks are calculated risks." He points out that Einstein Bagels spent $600 million creating its bagel empire. New World purchased the 465-unit chain for a relative bargain: $190 million, when you add in Einstein's debts.

Still, these are bankrupt companies he's buying. No worries, says Kamfar. New World is structured so if a new addition to the business doesn't turn around, it won't bring ruin to the overall enterprise. "One book I re-read all the time is The Art of War [by Sun Tzu, Oxford University Press]," says Kamfar, "and one of its central messages is: 'Don't get defeated.' While that may sound simplistic, or even silly, it's actually very profound. As you make your bets, don't do anything that will allow your company to go under. Make certain you always have a Plan B."

ISN'T THAT DANGEROUS?
What's a stupid risk, and what's a calculated risk? When it comes to your business, only you can determine that. But if you're trying to figure it out, try following these five steps.

1. Determine the worst-case consequences of taking the risk. If you can't live with the consequences, then it's probably a stupid risk, and you need to hatch a contingency plan or retool the risk so the possible catastrophic results can be downgraded to at least just "bad."

2. Research the risk you want to take as much as possible. Wise entrepreneurs look-or at least glance-before they leap.

3. Seek advice. Whether you hire a consultant, discuss the risk with your employees, or talk it over with a friend and get some feedback.

4. Ask yourself: "Will I lie awake at night for the next several years, wishing I had taken this risk?"

5. Now ask yourself this question: "Is not taking a risk a bigger risk than taking it?" If the answer is yes, then what are you waiting for?

Plan B

Judy Estrin is all in favor of a Plan B, and she probably wouldn't mind a Plan C. Estrin, 47, is a serial entrepreneur. She and her husband, Bill Carrico, 52, have been starting businesses since 1981, when they formed Bridge Communications, which made computer hardware and merged with 3Com in 1987. Then they moved on to start Network Computing Devices in 1988, going public in 1992; and in 1995, they created Precept Software, which was purchased by Cisco Systems three years later. Estrin, an engineer as well as an entrepreneur, serves on the boards of Federal Express, Disney and Sun Microsystems.

Estrin is now CEO of the couple's latest company, Mountain View, California-based Packet Design, founded in 2000. The new firm launches startups-taking risk to a seemingly foolish degree, especially today. But the first company Packet Design launched, Vernier Networks, which develops software that helps network managers protect wireless local area networks from intrusion, raised more than $10 million from investors last year. Everything seems to be off to a roaring start.

But like Kamfar's, Estrin's type of risk-taking is analogous to a stuntwoman driving a car into a brick wall: It's less dangerous than it looks because of all the precautions taken. Packet Design relies on plenty of internal research before sinking finances and energies into a startup.

"You have to believe in your convictions, but that doesn't mean you follow them blindly."

"I believe in calculated risks and known risks," says Estrin, who surely is thinking of a few dotcommers who have come and gone. "There are a lot of entrepreneurs who say 'Let's jump into it and let's not worry about it.' I think we have been much more about understanding what the risks are, and then making the right trade-offs and deciding which risks to take, as opposed to just thinking that taking a risk is always the right thing to do."

One of Estrin's biggest risks came early in her career, when she and her husband had secured investments to create Bridge Communications, which relied heavily on Ethernet technology. At the same time, a technology research firm concluded that broadband technology would stomp the Ethernet into the ground.

"The investors were very concerned," recalls Estrin. "But we stood fast and said, 'That's not going to happen.' We ended up being right, and we really did believe we were right." And that belief is crucial to taking a risk, Estrin adds. "You have to believe in your convictions, but that doesn't mean you follow them blindly."

Peering Over Cliffs

If you're the parent of a 12-year-old boy and you haven't taught him about risk, chances are Todd McFarlane already has. The comic book artist, known primarily for the Spawn series, has created an entertainment empire that features many risk-loving superheroes. So it's not surprising that when you ask McFarlane about the risk, he comes up with some nice visuals.

An entrepreneur, he says, needs to take a leap of faith every once in a while: "The average person will tippy-toe up to a cliff, look over and see that it's a 200-foot drop. They'll see that there are mattresses down there, but they'll ask all these questions, and maybe if you talk to them long enough, they'll make the jump-if they have three parachutes on their backs.

"The entrepreneur, when he sees a cliff, actually gets back 50 feet so he can get a running start. He flies over the cliff, and about half way down, then he'll ask the question: 'Oooh, I wonder if there's anything to land on.' Fear of failure is the least of [an entrepreneur's] concerns because we're motivated by potential, by something else we think we're going to get."


"Fear of failure is the least of [an entrepreneur's] concerns because we're motivated by potential."

McFarlane, 41, knows what he's talking about. His first serious risk began with his decision to walk away from a job that made him the country's best-paid comic book artist, drawing Spider-Man for Marvel Comics. He left in 1991 to create his own comic book series-Spawn, which went on to gross $85 million as a feature film in 1997. The Spawn series-and 35 other comic book titles-have sold more than 150 million copies worldwide since 1992.

McFarlane is CEO of Todd McFarlane Productions, parent company of Todd McFarlane Toys, Todd McFarlane Entertainment (film and video), and McFarlane Design Group (photos and designs). And while McFarlane won't discuss hard numbers, his businesses reportedly bring in an annual $50 million. McFarlane, meanwhile, is said to be worth $130 million, which means he can make his own fantasies come true: In 1998, he spent $2.7 million to purchase Mark McGwire's 70th home-run baseball.

But none of this would have happened without taking what many entrepreneurs might consider a big risk. Todd McFarlane Productions-which staffs around 120 people and is based in Phoenix-has never relied on market research in creating their toys and comic books. McFarlane just relies on his gut.

"I've done some marketing and focus groups through Hollywood and [with] other companies, and I hate to say it, but I thought most of it was a waste of time," says McFarlane, "because what ended up coming out of most of it was common sense. For all the time and energy and resources you have to put into it to grasp the three or four nuggets that you can use, I'd rather go to the school of hard knocks. I know who my audience is, because for the longest time, I was the audience. So most of what I make, I say, 'What would I personally want?'" And though McFarlane admits that he doesn't succeed every time, "you apply what you learn to the future," he says.

Get in the mood for risky business with these articles:

Practice Your Peril

There is no right way to take a risk, contends Bette Price, co-author of True Leaders: How Exceptional CEOs and Presidents Make a Difference by Building People and Profits (Dearborn Trade Press). "Entrepreneurs are risk-prone in a variety of styles. Some will plunge forward into risk, and some will tip-toe into it cautiously. Neither approach is right or wrong." But if you tip-toe at a glacier's speed, you could be missing out on a great opportunity, acknowledges Price.

If you're still nervous about jumping off that proverbial cliff, you could always practice first in a way that won't necessarily affect your business. Kamfar did, when he was a 21-year-old spending a year in England between college and graduate school. He went fire-walking.

Feel like keeping your socks and shoes on? Then forego the fire-walking and instead sign up for flight training to better your business skills.

"One of the first things you had to do was sign a waiver acknowledging that you understood you might catch on fire and burn off a limb or die," says Kamfar, who describes walking on hot coals as "very liberating."

But you should never fire-walk-or take a giant risk when your company is at stake-if you're truly frightened. "If you're afraid to take a risk, that fear is trying to tell you something," says Kamfar.

That's because risk-taking is indeed something of an art form, and it requires practice. And the more successful you become, the more complicated it gets to take a risk. "Here's what I've lost, and it bugs me," says McFarlane. "When we were small and confined, I could self-indulge more. Now I have to put on the 'Todd, the CEO' hat and ask if what 'Todd, the artist,' likes is prudent for the well-being of the company? Sometimes, the answer is no."

GUT CHECK
Take our risk quiz now!

That may be something that gives you pause. Take an unnecessary chance, and your company could end up the size of a continent. Next, you'll be trying to decide how to market a comic book called Creech 2: Out for Blood, and you may lie awake at night, wondering what sort of lighting you should put on your $2.7 million baseball.

But isn't it worth the risk?


Every day, as a freelance journalist in Loveland, Ohio, Geoff Williams is risking his life in a world of danger and intrigue. Why, just last week, he dropped a stapler on his foot. "This office is a deathtrap," he says.

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