Why should the effects of risk be considered when starting an entrepreneurial adventure?

Question

What will be an ideal response?

Answer 1

Much of new venture risk occurs early in the creation process. Borrowing a term from product development, we can call the period of time prior to launch and startup the fuzzy front end, which simply means that the activities undertaken at this point are often unclear and subject to change as more information is obtained. The fuzzy front end has been modeled in economic terms. Simply put, the amount of investment an individual is willing to make in a new product-or, in this case, in a new venture-is a function of the probability of its success, the value of that success, and the cost of failure [Inv = ƒ(PS + VS + CF)]. A change in any one of these values will alter the economics of the bet. Nascent entrepreneurs use the time spent in the fuzzy front end to calculate the probability of success as an entrepreneur; what that success will mean in terms of return on his or her investment of time, money, and effort; and what the risk or cost of failure might be. Because these risk estimates are highly subjective, it's important for entrepreneurs to gather sufficient information and test the business model to reduce that risk as much as possible.