Not a Risk Taker? Don't Fret. Neither Are Most Entrepreneurs

Saras Sarasvathy

Last Updated Jul 30, 2010 8:38 PM EDT

Saras Sarasvathy

Saras Sarasvathy, professor of entrepreneurship at the University of Virginia's Darden School

Big-time entrepreneurs almost always look like big-time risk
takers. Yet nothing could be further from the truth. While plenty go to great lengths to make their ventures succeed, spending their
savings or going into debt to pursue their dream, they also tend to up their
odds by systematically lowering their risks. "The experienced
entrepreneurs learn that gambling is not the way to build a business,"
says Saras Sarasvathy, a professor of entrepreneurship at the University of
Virginia's Darden School. In fact, when it comes to attacking
problems — especially high-stakes decisions — the best
entrepreneurs are downright conservative.

Take Leonard Shoen, the founder of U-Haul. Shoen had $5,000
to work with when, in 1945, he decided to launch a business renting trailers
both in-town and one-way across the country. That was a fair amount for the
time, but Shoen spent nearly all of it just buying and fixing up trailers he
needed to get started around his home in Washington State. The problem was that
for his plan to work, Shoen needed hundreds of trailers stationed across the
country — a notion that looked foolish with that much money and no
proven market.

But Shoen got creative as he went about figuring out ways to
expand. To solve the problem of distributing the trucks across the country, he
let the first wave of renters take the trailers for practically nothing on the
agreement that they would establish franchise rental locations wherever they
were going. He bought more trailers, but he sold them to employees, family
members, friends, and investors who would then lease them back to Shoen’s
company. That way the owners, not Shoen, were responsible for upkeep. Then, to
set up the rental locations, Shoen leased unused parking spaces at gas stations
and he then enlisted the station owners to manage the rental paperwork, making
them partners in the business.

It was strategically brilliant. Shoen had put himself in the
best possible spot by spreading the risk across so many people in so many
locations. Had the whole thing flopped, Shoen would have been out his time and
roughly the $5,000 he started with — money that Shoen decided up
front he was willing to risk.

U-Haul trailer

As a case study, U-Haul baffles business school students. Sarasvathy
says that when she asks her students to write a business plan for U-Haul, despite
knowing that the business is successful today, most of them conclude it’s
just not feasible. The business requires the entrepreneur to sink too much
money into assets that quickly lose their value, and there’s little
that would prevent a wealthier competitor from swooping in and building the
business better and faster. Even worse, at the time there was little proof that
there was much of market. (Shoen determined there was a need after he tried to
rent a trailer to move his belongings from Los Angeles to Portland, Ore. No one
would rent him one — not exactly the kind of market research outside
investors like to see).

The lessons Shoen’s story offers, Sarasvathy says,
are valuable for anyone eager to make their venture work. Like many successful
entrepreneurs, Shoen began by coming up with an amount of money he was willing
to lose — something Sarasvathy calls the “affordable-loss
principle.” It’s a simple but powerful concept, and
certainly not the mark of a shoot-for-the-moon risk taker type. “By
settling the question of what you’re willing to lose, you play the
game more conservatively than it at first seems,” says Sarasvathy. “And
you end up investing less than if you were blindly focused on the upside.”

Doing this is psychologically helpful as well, she says.
When you identify the worst-case scenario — in Shoen’s
case, losing $5,000 — you gain a certain amount of control in an
otherwise uncertain situation. You can, after all, control how much you are
willing to lose. It’s a key reason that most entrepreneurs —
especially in this economy — argue that working for themselves is far
less risky than working for a big company
. To a large extent, they’re
controlling their own destiny, and that makes life a lot less uncertain.

(U-Haul trailer photo courtesy of Flickr/Bravo Six Niner Delta, CC 2.0.)

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