Risk and Reward in Small Business
A neighborhood walk down smoke filled streets and its rewards.
We went for a walk on Friday evening. The forest fire smoke was again blanketing the city, and the neighborhood streets felt empty. The air quality index was in the 10+ range. This reading, I learned, translates to Very High Risk. We considered the risk and set out anyway. Or perhaps we ignored it. We wanted to be in our small, familiar, hazy part of the world. The risk seemed small.
The sun was low, obscured by the smoke. You’re never supposed to look directly at the sun. UV rays, and all that. Its brightness usually discourages the attempt. But, as we headed down our street, there I was, mindlessly staring up at its dull, tame face. The risk took a beat to pop into my brain to alert me.
Some things you do while knowing the risk, some things you do without knowing. Some choices and actions have rewards that make the risks worth taking. Some don’t. We can’t always be sure of the risks or the rewards. But we still do things. We set out anyway. Life is generally like that, but especially so with small business. There’s a strong preference for action over analysis or reflection.
For me, there are four categories of risks and rewards in small business: personal, relationship, finance, and business. I fit every new fact related to the topic into this table of two columns and four rows. Let’s work through that table first.
Personal risks in small business include the various physical and emotional strains and stresses that come with starting and running a new business. It tests your skills, your stamina, and your courage. You could discover things about yourself you don’t like. You could find your limits are much closer than you thought. Your self-image can take a beating.
Personal rewards include developing a growth mindset, the idea that you can improve in your not strong or not strong enough areas. They include the confidence that comes with getting things done, solving problems, and making money moves. A small business can stifle you, but it can also allow you to flourish. You have to see it as a challenge. You work through different levels, you become a more capable person.
Relationship risks increase if there’s money involved. If you’ve gone into business with people you know and trust, the inevitable issues may leave you feeling you no longer know or trust them. If you’ve borrowed money from friends and family, bad news in the business will strain those relationships. And if you’re sacrificing household income for the sake of your business, you’ll need a very understanding and patient or independently successful spouse. Also, because small business can be so consuming, you’re also likely to be less involved in all of your outside relationships. Finally, if things go wrong, you can end up hating people, not specific people; people; you know, all of them; an attitude which will almost certainly hurt your chances in future relationships.
Relationship rewards include the people you’ll meet — customers, staff, suppliers — and the experiences and stories you’ll share, the stuff and memories that fills up a life. If you’re in business with partners and the business and the relationships survive, they’re both likely to be much stronger, the ride or die variety. Leading your team will teach you how to be a better leader, so long as you pay attention, and you recognize and learn from your mistakes. And, if you’ve done your part and not sulked or hidden away, your overall ability to be in, read, and build relationships will be much improved.
Financial risks are mostly obvious. You can lose the money you put in. What’s less obvious is you can also lose the money you didn’t make doing something else. They call this opportunity cost. When you combine it with the magic of compounding (or the dark magic of foregone compounding), choosing the wrong opportunity can cost you in a big way in the short and the long term. You’ll always be the little adjusting entry to make the numbers line up at the end of the month.
Financial rewards are also mostly obvious. A successful, stable or growing, money-making business is a beautiful thing. Especially if it gets to the point where it runs without much involvement from you. This doesn’t have to catapult you into wealth, but you’re going to be close enough that the difference shouldn’t matter. And, if it does, you can roll the dice to grow even faster. A business that’s throwing cash into the bank account at the end of each month gives you, its owner, so many options.
Business risks include those things that frustrate or prevent your business from reaching its potential. They include the economy, your industry, markets, suppliers, competitors, technology, capital, anything and everything. Your business can feel like it’s blocked in on all sides and there’s no way to move. It can also be blocked by your inability to find a compelling product or service or a business model and a cost structure that generates a good profit from selling that compelling product or service. Another source that’s quite common is shallow management skills.
Business rewards, outside of the financial category, are subtle. A good small business will have customers who swear by it. It makes money, yes, but it does it in such a way that it’s a net win for the different groups it brings together: customers and employees being the main two. It’s a nice feeling to play your part in that. With a good management team and capable employees, a growing business will change and evolve in surprising ways. I’ve always found this part of business, the growing up, a thing to admire. And, of course, a growing, successful business can open many other doors and generate interest from more established players.
The neighborhood was quiet. Ain’t no sound but the sound of our feet.
N. had been reading The Silk Roads, an account of “the arteries along which people, goods, ideas, religions, disease and many other things have flowed”1 between Europe and Asia. One chapter told the story of William Knox D’Arcy, a British businessman, and the role he played in the discovery of oil in Persia. D’Arcy, already wealthy from mining successes in Australia, negotiated a sixty year concession from the Shah of Persia to secure the oil rights for most of the country’s territory. This was at a time when there was no expectation that the ancient land had any oil to offer.
D’Arcy’s team, led by George B. Reynolds, began drilling at the end of 1902. The search continued for three years across several sites without finding a deposit of significance. By 1905, D’Arcy was under considerable financial pressure. He was forced to bring in another partner, the Burmah Oil Company Ltd. Burmah became the main investor and D’Arcy’s operation became a subsidiary. Exploration and drilling continued for the next three years across the concession area.
By April [1908], with no success, the venture close to collapse, and D'Arcy almost bankrupt, he decided, with Burmah, to abandon exploration in Iran. In early May 1908, they sent Reynolds a telegram stating that they had run out of money and ordering him to "cease work, dismiss the staff, dismantle anything worth the cost of transporting to the coast for re-shipment, and come home". Reynolds delayed following these orders and in a stroke of luck, struck oil at 1,180 feet (360 m) shortly after on 26 May 1908.
In April 1909, D'Arcy was appointed a director of the newly founded Anglo-Persian Oil Company (APOC), which would later become British Petroleum (BP).2
As N. told this story, we walked past an open, well-lit, two car garage. Inside were stacks of imported boxed goods, arranged in rows stretching to the back wall. There was a platform or counter area in one corner, the purpose of which wasn’t clear. The homeowners and a customer, apparently having concluded their transaction, stood in the driveway, talking quietly; exchanging news, perhaps, of another faraway home. It was a garage business that, against the background of our conversation, resembled a stopping place for a merchant caravan. Our neighbors and their customer appeared as figures trading, traveling, and exchanging news on a modern silk road.
I thought of D’Arcy and why he risked his wealth for more wealth; making a bet on finding oil where no oil had been found before, because, well, because he could I suppose; negotiating, as a private businessman, a ridiculously favorable concession from the leader of a nation; pushing most of his chips in, losing, then, pushing in the rest, then, losing again, damaging the bankroll of his more moneyed partner; giving up, ordering his crew to pack it in, facing ruin; and then, by a stroke of luck, saved; he ends up a significant early shareholder in what was to become BP.
This fit the thoughts that preoccupied me this week. For now we see through a glass, darkly. We don’t know how things are going to turn out when deciding our course of action. If we do know an outcome in advance, then there’s no decision to make, really. Decisions require real, plausible alternatives. They involve uncertainty, risk. They turn out to be good or bad mostly in hindsight, by their rewards or consequences. This makes our rational, technocratic streak very uncomfortable. So the experts focus on process. They apply the enormous store of mental tools our species has developed to master our complex and unpredictable world. They invent Decision Science. So that we can say our decisions are good regardless of the outcome so long as they can be shown to be the best choice given the information available at the time.
But, like D’Arcy, we know or suspect that our decisions, at their core, are still a gamble, a calculated one or a mad and desperate one. And with any gamble, sometimes luck saves us, sometimes it doesn’t.
When Kris was young, he would sometimes go with his father, an air cargo courier, on his deliveries to a local grocer. The store was relatively small and the prices were high. But it was always crowded. The secret? It had the freshest produce in the city. Our family shopped there. N. still remembers the figs. For sweetness and ripeness, their only rivals were those she had at a Persian wedding in Los Angeles. She was delighted with the experience in L.A. She was shocked when it was replayed in Edmonton.
Kris’s father was one link in the delicate supply chain that brought these rare delights to the eager shoppers of our northern prairie town. The big box stores couldn’t or wouldn’t compete. After years of experiment and setbacks, the owners, three brothers, had found a concept to compete with the supermarket giants. And not just compete. The business, from a slow and cautious beginning, became very successful. It was an Edmonton institution. The brothers had found the elusive magic formula, the one that turns an ordinary small business into a money printing machine. Or it at least seemed that way, to me and to Kris, whenever we visited.
At some point, the brothers decided to expand to Calgary. They had a lot of goodwill and name recognition in Edmonton, a place they’d called home for many years. Would the magic be so easy to recreate in our southern neighbor? It was a gamble, but one they felt was worth it. The rewards would be huge. Because, by this time, they had a bolder vision: a larger space, expanded departments, more concepts, prepared foods, organic beef, a blitz of advertising, an opening night party, “to which 500 guests were invited.”3 The brothers had done their research. They had big plans. They pushed in the chips they’d won from the first store to place a big bet on the second.
While telling me this story, Kris recited some lines of poetry. I didn’t catch the first few. He switched so suddenly from a person talking to a person reciting poetry that it took a moment for my ears and brain to adjust to the change. I heard and remembered the last line though: “Hope lies to mortals.” I Googled to discover the following poem by A.E. Housman:
I to my perils
Of cheat and charmer
Came clad in armour
By star benign.
Hope lies to mortals
And most believe her,
But man’s deceiver
Was never mine.
The thoughts of others
Were light and fleeting,
Of lovers’ meeting
Or luck of fame.
Mine were of trouble,
And mine were steady;
So I was ready
When trouble came.4
A melancholy point of view, isn’t it? An old person’s weariness in a young person’s circumstances. Averse to risk and distrusting of rewards. The fact that Kris had committed these words to memory reminded me of G.K. Chesterton’s quote “that the most practical and important thing about a man is still his view of the universe.” Kris’s view in business matters, through his training (he’s a CPA) and through his years of experience with small business clients, understandably leans to conservative.
He sees the statistics — the failure rates, the low returns on invested capital, the small proportion of startup small businesses that grow into huge successes that make their owners rich — one individual, one sample path at a time. So when someone’s beaten the odds and built a stable, profitable, and reasonably successful business, but is now considering a big expansion, Kris becomes, I think, even more cautious.
Hope lies to mortals. Success doesn’t always lead to success. In the small business world, the reality is closer to way leads on to way. With each step, you think you’re closer to your goal, but you’re not always sure. The next way could be very unlike the last. You don’t know.
Risks — personal, relationship, financial, and business — all intensify in an expansion stage. This is when owners believe, rightly or wrongly, that their business model works, that it’s ready to grow; or they see a new, not to be missed opportunity. They assume bigger risks in pursuit of the bigger prize, committing most of their resources and taking on debt if needed. Like the fresh market brothers on Kris’s father’s delivery route. Their business folded in Calgary. It disappeared from Edmonton. I don’t remember when. The Internet offers no explanation, no post-mortem. The magic didn’t follow their business down Highway 2.
I’m not sure there’s a clear lesson here though. An entrepreneur, “clad in armour” with steady thoughts of trouble, can certainly protect and steward a business he’s built. But, to build such a business in the first place, he has to consider more than trouble; he has to see opportunity as well. Rewards correlate with risk after all.
If an entrepreneur wants more than the lowest level of rewards, he has to accept more than the lowest level of risk. He has to number among the group with thoughts of “luck and fame.” He has to listen to hope, even though it may deceive him. He has to accept the possibility of failure.
In exchange, he gets, in my opinion, the unique rewards that small business offers: the sense of agency and discovery that comes with running and building something that’s one’s own. The brothers may have stretched too far. But others make it to the next stage, enough of them at least to be visible and to give the rest of us hope. Besides, there’s two sides to “You just don’t know.” Not knowing things will work out isn’t the same thing as knowing that they won’t.
The wind was against them now, and Piglet’s ears streamed behind him like banners as he fought his way along, and it seemed hours before he got them into the shelter of the Hundred Acre Wood and they stood up straight again, to listen, a little nervously, to the roaring of the gale among the tree tops. “Suppose a tree falls down, Pooh, when we were underneath it?” “Supposing it didn’t,” said Pooh after careful thought. Piglet was comforted by this.5
Rounding for home, N. told me the story of how a strong woman in her extended family built a thriving Halal business in England, only to see it lost when she handed it to the wrong member of the next generation. By that time, we had seen two other potential garage businesses, an auto repair shop and a barber shop, we’d stopped for bubble tea at the Korean place, and for carrot cake at the always busy corner café. Risk was like the forest fire smoke. It’s everywhere. And yet, there we were, all of us, wanting to live, and moving through it.
The Silk Roads by Peter Frankopan review – a frustrating trail, Anthony Sattin, Guardian.
William Knox D’Arcy, Wikipedia.
A Fresh Start, Joanna Crispens, Supermarket News.
The House at Pooh Corner, A.A. Milne.