How Much Risk-Taking is Too Much?
In business, risk-taking is necessary and good. As they say, no risk, no reward. But all too often, executives simply ignore the risk and hope for a miracle. Like when Han Solo - about to fly the Millennium Falcon into an asteroid field - shouts, "Never tell me the odds!"
That would be fine if there weren't other people on board the ship, not to mention a couple of droids. Similarly, executives are almost always betting with other people's money and livelihoods.
That's why successful companies sort of frown upon the whole idea of their managers living in make-believe worlds where miracles happen and spacecraft captains can successfully navigate asteroid fields without getting vaporized.
Wait, let me guess. You don't think that sort of thing happens very often in real business world. You think I'm making this stuff up. Believe me, I wish I were, except I'm not the sort of guy who wishes for things. The truth is it happens all the time.
I've seen plenty of executives in companies big and small do just that - bet the farm on idiotic leaps of faith that had no chance of panning out. I mean none. There were times when I definitely thought I was the only sane guy in the boardroom. Let me tell you, that's a scary thought.
Here are a few examples, so you can see what I'm talking about:
1. Solyndra Challenges the Laws of Supply and Demand
Just over a year ago, solar panel maker Solyndra brought in a heavy-hitter - former Intel veteran Brian Harrison - to replace company founder Chris Gronet as CEO. Two months ago, Harrison told congress and reporters, "We're growing, doubling in size year-over-year, and on track" while, at the same time, he was scrambling to keep the company afloat.
Three weeks ago, the company filed for bankruptcy and laid off 1100 workers.
That's because the company found itself in a market literally flooded with a far cheaper and just as effective type of photovoltaic cell, rendering its technology and the $733 million state-of-the-art robotic facility it built with other people's money suddenly obsolete.
Just to be clear, Harrison came on the scene after the controversial $535 million federal loan guarantee and over $1 billion of private capital, so his hands were clean on that front. And yet, he still apparently and allegedly lied to congress. Why did he do that?
He was hoping for a miracle, I guess.
2. Can a Company Become Its Own Customer?
Years ago I ran marketing for Cyrix, a micoprocessor maker where the founding CEO actually decided to price our chips higher than Intel's, even though Intel had faster chips and all the big customers lined up like bowling pins.
When that didn't work, he proposed that, since we were having trouble getting PC makers to buy our chips, we should make and sell our own PCs' in competition with our customers. That prompted legendary venture capitalist L.J. Sevin of Sevin Rosen Funds to remark, "I don't know. This whole thing just makes my butt pucker."
Did the CEO listen to the VC who was famous for being right? Of course not. Did he follow through on his dopey strategy? Of course he did. Did it work? Not a chance. And a year later, he was fired.
So, why did he do what he did? Well, he wasn't dumb, that's for sure. He built a $300 million company making some of the most complex semiconductor chips known to man at the time. And he wasn't crazy, either. Idiosyncratic, for sure, but not nuts. Nope, that wasn't it.
He was a lot like Han Solo, except instead of being a cowboy in a spacecraft, he was a cowboy in a corner office. And he just didn't want to know the odds.
3. Owning a Restaurant is a Sure Thing?
If you've never watched Restaurant Impossible, it's a great show where chef Robert Irvine spends 48 hours and $10K to rescue restaurants that are going under. The owners of some of these joints have sunk $1 million or more into their sinking dreams. In many cases they've had no previous restaurant experience but thought it would be a good investment. Seriously, it's a common theme.
It makes you wonder what planet these people live on where owning and running a business you have zero experience in, let alone a restaurant, is a good investment? The vast majority fail. Even people who know what they're doing fail. What are these people thinking?
So, why the epidemic of CEOs and business owners who believe in miracles? Five reasons:
- People are people, in life as in business. And people have hopes and dreams. The phrase hope springs eternal has meaning because lots of people need that and some of them run companies.
- Some people think they're special, destined for great things. They're not, of course; we're all made of the same flesh and blood. But that belief is often self-fulfilling. That is, until they reach a point where their belief in themselves loses out to reality, usually in the form of a competitor with a better product.
- Sometimes, smart people do dumb things, mostly because they lack the objectivity needed to consistently make smart decisions. Sometimes they're too close to the situation, as was surely the case with the Cyrix CEO. Other times their assumptions are flawed or based on limited data. There are lots of reasons.
- The answer that I find least satisfying is that some people have a higher tolerance for risk than others, and not in spite of the fact that they're risking other people's money, but because of that fact. And for whatever reason, some of those cowboys grow up to be CEOs.
- Lastly, while we live in a universe that prefers chaos to order, some people - especially control freaks - just can't abide that. And, like it or not, control freaks are natural leaders. FYI, the second law of thermodynamics - the physical world's tendency toward increasing entropy - is actually why miracles don't happen. In case you were wondering.
Also check out:
Image Patricia Drury via Flickr