GCSE / Level 2 Revision Notes

Starting a Business - Risks and Rewards

Taking a calculated risk

An entrepreneur cannot avoid risk in a start-up and everyone knows that a large proportion of new businesses eventually fail. The trick is to assess:

• What the main risks are in a new business (e.g. unexpected costs, lower than expected sales, failure to secure distribution)
• The probability of the risks happening (this has to be an estimate)
• What would happen if the risks occur – cost, cash etc

The third part of the assessment above is perhaps the most important.  For the small business, often starved of cash, even a relatively small event can prove disastrous. The entrepreneur has to assess the potential impact on the business of a risk, but also assess the upside (where things turn out to be better than expected).

So, a calculated risk can be defined as follows:

“A risk that has been given thoughtful consideration and for which the potential costs and potential benefits have been weighted and considered”

Entrepreneurs take calculated risks everyday, since they take decisions everyday.  Each time they take a decision they are weighing up the significance of the options and (often intuitively) working out whether to go ahead.

Rewards from enterprise

That’s enough about the negative side of setting a business up. What about the rewards?
We looked earlier at the motivations for setting up a business.  Many of the intangible rewards that arise from being in business happen because these motives are achieved. 

• A sense of satisfaction
• Building something
• Being in control
• Making that first sale
• Opening a new location
• Employing more people
• Getting an industry award or good publicity
• Getting great feedback from customers

These are the kind of non-financial rewards that give entrepreneurs a buzz.

However, ultimately, it is the financial rewards that justify the effort and make taking the risk worthwhile.
To illustrate the potential financial rewards, here are some examples:

• Karen Darby sold her business SimplySwitch, a service allowing consumers to compare rates for gas and electricity suppliers among other things, to the Daily Mail for £22million
• Linda Bennett, one of Britain’s most successful female entrepreneurs, sold her women’s fashion chain, LK Bennett, to two venture capitalists for £70million
• Gerry Pack started up his business Holiday Extras providing airport hotel rooms and parking with just £100.  He sold it in 2005 for £43million
• Darren Richards started up his online dating agency (DatingDirect.com) with just £2,500 and sold it eight years later for £30million

You should also remember that there is a strong tradition of entrepreneurs who have built and sold one business for a substantial amount going onto build other successful businesses.  They never lose the entrepreneurial buzz.  Such people are called “serial entrepreneurs”.