The Risk Advantage

Embracing the Entrepreneur's Unexpected Edge

Tom Panaggio

• Publisher: River Grove Books
• Year: 2013
• eBook ISBN: 9781938416453
• Topic: Business
• Subtopic: Leadership
• Index: Business

As an entrepreneur and racecar driver, Tom Panaggio has learned that you cannot avoid risk if you want to be a winner.In The Risk Advantage, Panaggio tells the story of how he and his business partners built two thriving companies: Direct Mail Express (which now employs more than 400 people and is a leading direct marketing company) and Response Mail Express (which was eventually sold to equity fund Huron Capital Partners). The book is designed as a guide for those who are contemplating an entrepreneurial pursuit, are already engaged in building a business, or are currently working for someone else and want to inject their entrepreneurial ideas and attitude. With The Risk Advantage, Panaggio aims to help entrepreneurs face the many situations, predicaments, and crises they’ll encounter during their lives as well as to help them formulate their leadership style and business strategy. The Risk Advantage is a story about an entrepreneurial journey that explores the relationship between opportunity and risk, two important forces that are necessary for success. Panaggio teaches that the unexpected edge for entrepreneurial success starts with identifying a worthy risk and then having the courage to take it. In his book, he identifies those risks based on what he’s experienced along his own journey.Opportunities are always there for you to grab. If you want to realize a dream, accomplish a daunting goal, or simply start your own business, you must be willing to embrace risk. Learning the lessons of The Risk Advantage is an important first step to do just that.

Chapter 1

ARE YOU IN?

Most of the time when people talk about business and risk, the focus is on how to avoid it. To me, risk isn’t negative; the spirit of risk has driven me, and my partners, to start and grow several businesses. And businesses that thrive have leadership that takes risks throughout the life of the enterprise. You may feel uncomfortable running a business this way, but the rewards are far greater than any unease you experience. The spirit of risk is the unexpected edge for every business.

We, as Americans, need the creativity, innovation, and economic power of small businesses and the entrepreneurs who lead them. The entrepreneurial spirit is more than the drive for success; it is a powerful motivational force that compels regular people to achieve extraordinary accomplishments. I am not talking about leading a Fortune 500 company or inventing the next technical phenomenon but the cumulative initiative that supports tens of millions of people and keeps our country economically viable. The best news of all is that there are no special qualifications required or tests to take to become an entrepreneurial success. Anyone can do it.

If you’ve heard the call to start a business, then you are responsible for taking the leap of faith and embracing risk to pursue your entrepreneurial dream. You are the future of American business and our economy; entrepreneurs and small business owners willing to embrace risk are the primary source of economic growth in the United States. The Small Business Administration’s “Small Business Economy 2011” report shows that small businesses created more jobs than large firms nearly 75 percent of the time across an eighteen-year span. And as far as the power of small businesses, they produced 46 percent of the private nonfarm gross domestic product (GDP) in 2008 (the last year for which data were available).

The leap of faith for an entrepreneur is the first risk we embrace when we’ve made the decision to start a business. For many people the leap of faith is the most formidable challenge they will face. It’s like having to walk a tightrope with a blindfold on. When you commit to starting a business, the pitfalls are many, the pressure is incredible, and the chances for long-term success are not in your favor. Yet when you recognize the Risk Advantage, you do it willingly and with enthusiasm. Every individual who is considering starting a business must accept the reality of personal risk before deciding to pursue his or her dream. Let’s begin to recognize the Risk Advantage by understanding the personal risks you must embrace. In this chapter I discuss the monetary risk, the precious resource of time, the personal challenges you will face with those close to you, and your own internal struggles.

The Personal Risks of Entrepreneurship

Certainty is an illusion; what seems to be a sure thing can lead to disappointment. To some people, the American Dream is to have a good job, a healthy family, and the chance to enjoy a comfortable retirement. These people have simple life goals with no desire to embrace risk even if it’s an avenue to a more prosperous life. However, even the secure path is uncertain, as the Great Recession that started in 2008 proved. Millions of people’s “secure” jobs evaporated, and their homes, retirement savings, and other comforts were lost too.

For an entrepreneur, business always involves some personal risk. The degree of personal commitment\ invested separates dreamers and planners from successful businesspeople.

“Are you a chicken or a pig?” I frequently heard one of my business partners, Phil Turk, ask this odd question, and one day I broke down and asked him what it meant. He explained: “Think about a bacon and egg breakfast. The chicken is involved, but the pig is committed.”

“The degree of personal commitment invested separates dreamers and planners from successful business people.”

A corporate executive is like the chicken that contributes to the meal but sacrifices nothing; this person wants to see the business succeed but has no personal investment risk. However, the entrepreneur’s commitment is entirely personal; it includes an investment of money and time, and the loss of other opportunities, despite their appeal. In every sense, entrepreneurs have “skin in the game” that makes them as committed as the pig.

An entrepreneur’s personal relationships with family, friends, business associates, and employees change as the business grows. Understanding why things change is critical to maintaining a positive attitude without losing a focus on your ultimate objective. Before you choose entrepreneurship, let’s look at some of these inherent personal risks.

Money

If there is one obstacle that stops most would-be entrepreneurs from following their dream, it’s the lack of money. Money buys resources, technology, and manpower—all critical elements in helping a new business succeed. Money is the ultimate financial risk; to pour life savings into an entrepreneurial pursuit is like walking the tightrope without the benefit of a safety net. It takes courage. Even though the commitment is substantial, it’s necessary to motivate you to keep pushing forward. If all capital investment is from your coffers, and not from outside sources, then you are truly committed. Still, financial problems can cause harm to families, a marriage, and other relationships, so the responsible entrepreneur needs to set exposure limits. You might have to find a source for additional financial support, which means either giving up a piece of your dream in the form of a partnership or taking on the responsibility of debt.

While the safety net of outside funding can lower your personal financial exposure, it also can be a source of conflict: Outside investment, no matter how small, creates a partnership. Therefore, decision making could involve outsiders who may not have the same passion, vision, or commitment to a dream that you do.

To obtain outside funding you will typically need to present investors with a business plan in which you describe what you are going to do, how you are going to do it, and when you plan on accomplishing the objective. Outside investors should not have any authority in the day-to-day operation of your business, and this should be clearly outlined in any agreements drawn up. Investors are entitled to regular financial reports and deserve the utmost in transparency, even if they are family members or friends. If they are knowledgeable about your particular business or have some unique ability that can benefit your cause, there is no harm in using them as outside consultants or advisers. However, I believe it is always best to keep investors at arm’s length.

We were fortunate that both DME and RME were self-funded, and we were not beholden to any outside creditors or investors. Taking on the responsibility of self-funding liberates you from outside influences and gives you total freedom. The downside is that your financial resources are limited to your bank account and any cash flow generated by business operations. Therefore it will be necessary to watch how you spend your money. If you deplete your entire pool of money or personal credit, survival can be difficult.

My brother Mike, who provided the initial funding for our company, was naturally prudent. I am convinced that was because of our modest family upbringing. He encouraged us to watch every dollar until the company could sustain itself on its own cash flow. And even in our most profitable years we maintained a conservative spending policy.

Building a successful business when money is tight is a true accomplishment. Committed entrepreneurs don’t allow a tight money situation to stop them. True entrepreneurial spirit promotes self-reliance and the willingness to find the money. There are many sources of funding: from family and friends and angel investors to professional investors who fund startups in lieu of a small percentage of ownership. There are also institutional funding sources such as banks, the federal government, and private investment funds. No matter where the money to fund your dream comes from, by overcoming the money obstacle you have already embraced the risk advantage while a potential competitor sits on the sidelines waiting.

Time

When you pursue a new enterprise, one resource that cannot be reimbursed, borrowed, or saved in an account for later use is time. Time is the most perishable resource of all; it exists in a continuum that neither slows nor forgives. Time is finite; it’s more precious than money and more costly to waste. While money is the reason many people never pursue their entrepreneurial dream, time is taken for granted.

Time presents us with a paradox because it is finite. Accept the risk of an entrepreneurial pursuit and you will be losing time from some part of your life. Limit the time you commit to your dream and you may lose your dream. Which do you chose?

Losing time from some part of your life is the risk an entrepreneur must accept because we only have twenty-four hours in a day with which to work. How you invest your time equitably is a test of your resourcefulness.

Where is our time best used? Volumes have been written about time management, and I cannot adequately address this subject. What I do suggest, however, is that you create a global priority hierarchy in which you list all personal and entrepreneurial commitments and classify them as an “A” priority, which is the highest and most important; a “B” priority, which is less important; or a “C” priority, which is of lowest importance but will need attention eventually. Then you must sit with your significant other and any business partners, discuss the issue, and come to an understanding about both your personal and your entrepreneurial priorities.

Making a commitment to realize your dream is one of the toughest decisions you will make. But the price you pay is worth it. However, making a commitment does not mean being a slave to your dream. The key to successful time management is building balance and margin into your life. Balancing the commitments of business with the commitments in your personal life has to be a part of your overall plan. Having margin in your life is equally important. While world-class athletes train extra hard, there is a point at which one additional minute of practice or training adds nothing to their performance. Building margin into your life means you avoid crunching too many activities or responsibilities into a compressed time frame; instead, you give yourself a chance to relax and decompress. Leaving no margin in your life and having unbalanced commitments leads to stress and, ultimately, failure.

In the early days of building our company, and because we partners were all young and single, we had plenty of time to commit to the business. It was not unusual for us to work weekends and late into the night. (Mike would consistently work well past midnight and was notorious for his raids on the refrigerators, claiming any food left by our employees. Many an employee was upset the next day when they opened the door to find their lunch was missing.) But as our personal lives changed and the company grew, we delegated responsibility to others as we realized that our time needed to be reprioritized. (There was great joy in the employee lunchroom, too.)

How much time must you invest? Too little means less than a full effort. Too much means other life segments suffer. You will learn to navigate these challenges as you proceed. Growth will allow you to delegate and spread your organization’s responsibility to more individuals. The Risk Advantage of a balanced life with adequate margin is less stress and greater productivity while enjoying a fulfilling personal life.

Loss of Other Opportunities

In addition to the investments of money and time, entrepreneurship entails another risk that you need to consider: opportunity cost, or what you lose from another opportunity because you are pursuing your present one. The opportunity cost of starting your own business means you forgo the security of a corporate position and the potential to ascend to a leadership role in a major company, and you thus sacrifice the monetary benefits that such an opportunity brings. When you make the leap of faith, you are not only forgoing this professional opportunity, but you are also accepting a personal sacrifice. For an entrepreneur, the opportunity cost of investing savings in starting a business means not being able to purchase a new car, to buy a bigger home, or to take a vacation. Your opportunity cost in time means not spending it with your family or enjoying an evening out with your spouse. These are important considerations that affect your quality of life and thus your depth of commitment.

As I mentioned, one of my greatest sales was convincing my sister Kathy to move from San Diego to Daytona Beach in the fall of 1983. The opportunity cost of this change was that she would no longer live in one of the most beautiful locations in America. But there was more to it: She had to leave the circle of friends she had cultivated in the five years she had lived there, and she abandoned the master’s degree in educational technology she was pursuing. In Daytona Beach she faced an entirely new environment with the uncertainty of a new company in an industry in which she had no experience, no circle of friends, and a paycheck that put her squarely in the lower income bracket. She cried every day and proclaimed she was giving it six months.

In retrospect she is far better off today both financially and personally than she was in 1983. She now recognizes the wisdom of embracing the risk of moving more than three thousand miles and that the opportunity cost was worth it. The tears have long since stopped flowing.

For both Kathy and me, the early years of our company were not very rewarding financially. However, we understood that this was part of the sacrifice we had to make. Meanwhile, many friends back in our hometown of Rochester, New York, were enjoying a financial windfall; even those who had not attended college were earning more than twice what we were. This was certainly a humbling experience, and it would have been difficult at that point in my life to assure myself that we were on the right path. Our plan for the future was actually right on track, though, and as history would prove, our risk in taking the leap of faith, in spite of the extremely low salary, was ultimately well worth taking. Our friends were not so lucky.

These friends had not been willing to embrace risk; instead, they chose certainty by accepting employment in the arms of Rochester’s long-time employment patron saint, Kodak. They never realized the opportunity cost of this decision until it was too late. In chapter 3, I will discuss Kodak’s decline in more detail. Today the company is a mere shadow of its former glory. Employment has been cut drastically from fifty thousand to three thousand. (Salaries, benefits, and retirement plans have been cut too.) Now the opportunity cost not only means the loss of potential entrepreneurial success that our friends might have enjoyed if they had been willing to embrace risk, it also means the uncertainty and loss of security as they head into the retirement phase of their lives.

Other Risks to Consider

Aside from obvious risks, moving away from the traditional job path into entrepreneurship carries inherent risks you might not have considered.

Negativity from Others

When you announce your plans to create your own business, expect two types of responders: well-wishers and doomsayers. Well-wishers are excited for you; they show admiration for your courage. They mean well, but don’t let their accolades go to your head and give you a false sense of confidence and accomplishment before you’ve done anything. You don’t win just for trying; this isn’t T-ball. In the real world of business, you never get the reward first because it comes exactly when it should: after you’ve earned it.

On the other hand, doomsayers can do the most damage; they suck all the energy out of your dream if you listen to them. Don’t be surprised that your greatest detractors are the people closest to you such as your immediate family and friends. They are most likely to raise doubts about the wisdom of your dream or your ability to achieve it. They may be trying to protect you, or they may be concerned about the impact of your decision on you and them. Regardless, the people in your inner circle are the most likely to be skeptical. They are concerned about what it will cost them if you fail or succeed. It is often difficult to stay positive in the face of negativity, especially when it comes from the people you love. But do not let the negativity of those around you influence your desire to keep moving forward. And don’t try to change them, either, by trying to convince them. Don’t waste your energy. The quickest way to shut up your detractors is to produce results.

“The quickest way to shut up your ...

Table of contents

• Cover Page
• Title
• Copyright
• Dedication
• Contents
• Acknowledgments
• Prologue
• Introduction
• Chapter 1: Are You In?
• Chapter 2: Opportunity and Risk Are Soul Mates
• Chapter 3: Where Risk Belongs in Your Business
• Chapter 4: The Winner’s Framework
• Chapter 5: Prisoner of Hope
• Chapter 6: The Freedom to Continue Your Journey
• Chapter 7: Embrace the Risk of Failure
• Chapter 8: Embrace the Risk of Proactive Marketing
• Chapter 9: Embrace the Risk of Standing in Your Own Line
• Epilogue
• About the Author