Business Notes: Risk and Reward

Entrepreneurs are prepared to take risks. They are investing time, money and effort into a new project that may or may not work. The danger is that it will not work and all their investment will be lost. Many new businesses fail. Look at the high street in your nearest village or town. How long have the shops been there? Have some opened up recently? Have some closed down in the last year? The landscape of the centre of most villages and towns is changing all the time as some business ideas fail and others rise to take their place. The real risk to entrepreneurs is that they will lose much or even everything they have put into a project because the business idea ends up failing.

Some of the causes of a risk are external. For examples, there could be a change in the economy, meaning people have less money to spend than entrepreneurs expected (and so demand for their products is lower than they hoped), or competitors may have changed their behaviour, making it more difficult for similar businesses to survive.

Alternatively the causes of risk could be internal. It may be that an entrepreneur’s understanding of the market is not as good as he/ she had thought and they make some bad pricing decisions. It may be that their judgement of people is poor and they hire the wrong people, with the result that the quality of service is not as good as the entrepreneur had hoped.

Entrepreneurs may sometimes undertake a project ‘because it is there to be done’. They may be driven by a desire to do something new. This in itself may be a reward in terms of self satisfaction: they can hopefully look back on their careers and be proud of what they have achieved. However, they may also be interested in other rewards from setting up, such as the financial gain from owning their own business. These rewards can be extremely high! For example, YouTube was set up in February 2005 by Chad Hurley, Steve Chen and Jawed Karim. The website includes music videos and movie and TV clips, as well as material posted by the general public. In 2006 the founders of YouTube sold their business for $1.65 billion! Not a bad return in less than 2 years.

To go ahead with any venture, the expected rewards must justify the risk involved. In an ideal world a project would have a high reward and low risk, but typically new ventures are very risky because there are so many things that could go wrong. In fact, many ideas do not even end up being launched. Entrepreneurs hit so many set backs or face so many difficulties that the project does not go ahead.

– Esjae x

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