The Biggest Calculated Risks That Paid Off
01 July, 2017
ASK any entrepreneur, and they’ll tell you that risk-taking is integral to their success.
The philosophy of taking risks, failing and learning along the way is a powerful concept to embrace, and it’s often the only way that a business ever gets to reach its full potential.
However, as you’ll doubtless already be aware, risk-taking is not about working oneself into a frenzy before making an ill-considered decision. Instead, it’s about taking a calculated risk – one where the pay-off is expected to outweigh the possible loss after carefully weighing and considering the advantages and disadvantages of a particular approach.
The following three case studies are examples of well-executed calculated risks, delivering lessons that any and every business ought to pay attention to.
Calculated risk #1: attempting international expansion
For many UK based companies, successful expansion overseas is a major pull. Not only does it mean enhanced profits and the opportunity to make money from an entirely new market, but it can also bring about huge reputational benefits and major prestige.
Few places (if any) are more attractive for a UK based business than the USA. With a lucrative market, huge customer base, exciting VC investment opportunities and the status of ‘cracking America’, international expansion to the USA is arguably as high-risk, high-reward as it gets for a business.
Of course, not everyone gets it right – even major British institutions such as Tesco and Marks and Spencer have failed at international expansion to the United States. But, that doesn’t mean it’s not possible.
Take Graze, for example. Anthony Fletcher (chief executive of this Richmond-based healthy snacks company) told the Guardian: “We only had to look at the size of the US snack market to know that we wanted a piece of it. America’s snacking and food retail markets are more than eight times the size of the UK’s, and clearly presented the biggest opportunity across the world to scale our business”.
America is a large market – or, more accurately, a patchwork of lots of different markets. The team behind Graze’s successful expansion to the US decided to jump in feet-first in order to “make inroads into this geography before other competitors beat [them] to it and got too much of a stranglehold on the market”, launching in every US state at once in December 2013. This bold move (and impressive commitment to research, planning, operations, strategy and more) saw Graze serving a customer in every state within 24 hours. Three months after launching in America, Graze had gained 100,000 customers, and in 2015, the company was making as much as £23 million a year in the US alone.
Fletcher says that they owe their success in America to the fact that they were “prepared to be concentrate on remaining agile through the launch, and being responsive and flexible to issues as they arose”. They also coined the phrase ‘silver spoon start-up’ to highlight that they were “offering all the thrill and buzz of working for a fast-growth start-up, but with a proven model and successful track record at home in the UK”, meaning that they could position themselves as a lower-risk option than their competitors.
So, perhaps other UK businesses who plan on joining the companies who currently export overseas should follow suit, taking on America in such a bold way. The success of such a venture will depend on the level of research undertaken before launch, an understanding of unmet market needs, and a clear idea about how a business is ultimately going to measure success. That’s the advice from Rob Johnson, founder of Foothold America (a company specialising in assisting businesses to enter the US market in a low-risk manner).
“The US is a competitive and diverse market, and even the best laid plans can fail,” says Rob.
“In our experience, focusing on local markets initially to develop a track record and establish a certain scale is a good place to start. Then, we recommend developing a detailed understanding of the US market to to establish who your competitors are, how you are differentiated and what the unmet market need might be”.
“All of this informs every aspect of your business plan, but also, consider… how you will measure success? In our experience, it pays to be cautiously bold: it’s expensive and risky, but success will be transformative”.
Calculated risk #2: adopting an unusual business model
It’s not just Graze who have done something out of the ordinary. In fact, Blake Mycoskie (the brain behind TOMS) took a major calculated risk too – one that paid off.
In 2006, Mycoskie found himself in Argentina and, after spending some time travelling, felt compelled to help the children he encountered by providing them with shoes. After carefully weighing up the pros and cons (he initially considered starting a shoe-based charity), he decided to create a for-profit business that would help to provide shoes for children in need. That way, he could provide a constant flow of shoes rather than facilitate periods of feast and famine, as a donation-based model was bound to present.
Mycoskie came up with a simple formula: for every pair of shoes he sold, he’d give a pair of new shoes to a child in need. A local Argentinian shoemaker, a translator and a handful of artisans helped to make 250 samples before Mycoskie introduced the shoes, and the concept, to Los Angeles. People bought into the design and the story, and it wasn’t long before TOMS shoes were being featured in Vogue magazine. More than 35 million pairs of shoes have been given away in 60 countries.
But, this one-for-one business model hasn’t worked entirely. For example, what becomes of a local cobbler who makes shoes for a living, only to find that a truck-load of his shoes are being given away? No-one will buy something if it’s available for free. This has meant that Mycoskie has had to evolve his one-for-one model in recent years. But, there’s no doubt that this business model was a risk worth taking from Mycoskie’s perspective: it’s a well-intentioned idea, it’s the risk was (and still is) an excellent marketing strategy.
If, however, other businesses are to follow suit and follow this one-for-one business model (or any ‘unusual’ business model for that matter), the best thing to do is exercise caution. Vice dean of Wharton’s Social Impact Initiative, Katherine Klein, advises that businesses employ a “careful, not cavalier approach when choosing a model”. She suggests that businesses ask themselves questions such as “which strategies, contributions or gifts do leading researchers and NGOs recommend to maximise impact? And what story and model will captivate and inspire consumers?”.
Calculated risk #3: working with a failed business
If using an unusual business model isn’t risk enough, how about those businesses who actively seek to work with those that have failed in the past? That’s something Jeff Bezos did when he launched Amazon’s grocery delivery service ‘AmazonFresh’ back in 2007. Instead of choosing a successful team to help him win customers over, he turned to Webvan (a grocery delivery service) – a company that (despite having millions of dollars in backing) went bankrupt within two years of going public. Webvan raised $375 million in funding and signed a $1 billion dollar contract to build high-tech warehouses before even finding a working business model. So, when Webvan failed, they failed spectacularly.
Bezos states that he chose to work with the Webvan team because he believed they’d have learned serious lessons from their experience of failure, and that their previous lack of success is what would give them the willpower to succeed.
It seems that Webvan have learnt a lot from getting it wrong the first time around, and Bezos’ calculated risk seems to be paying off: AmazonFresh has been well-received in the US states that it’s currently available in, and it’s now expanding to the UK too. So far, AmazonFresh is learning where things went wrong with Webvan in the past, making the most the pair’s existing warehouses in the US and even partnering up with major supermarkets here in the UK such as Morrisons.
But, what should businesses look for if they’re going to actively seek to work with a team, brand or individual that has a history of failure? Well, perhaps they ought to take the advice of John Brady, founder and principal at Protem Partners. He believes that focussing entirely on success can be a red herring, and that failure is actually what enables people to make great innovations or improve the quality of life for all. However, he advises that businesses should be careful to distinguish between failures and catastrophic failures. ‘Standard’ failures are a good thing: they can allow you to find a boundary and push against it. But, a catastrophic failure – the result of being unnecessarily reckless – is far beyond the realm of a calculated risk.
Partners and entities that make catastrophic failures might therefore be best avoided. But, it’s clear from all the examples above that calculated risks – when weighed carefully and injected with a dash of entrepreneurial spirit – can really pay off.