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Risk and Return
Our greatest glory is not in never falling
but in rising every time we fall.
Confucius
Summary
What determines the success of entrepreneurial
efforts and how can they be managed?
A new venture that creates a novel solution to a problem
will be subject to uncertainty of outcome. An action in an
uncertain market is sure to experience a risk of delay or
loss. It is the entrepreneur’s task to reduce and manage
all risks as much as possible.
Chapter 6: Summary
Technology Ventures: From Idea to Enterprise
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Risk and Return
Risk is the chance or possibility of loss.
Regret is the amount of loss a person can tolerate.
Chapter 6: concept
Technology Ventures: From Idea to Enterprise
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Risk and Return
Hazard =
Level of Total
Investment
Risk = Hazard x Uncertainty
Perceived Risk
Variability of
Outcomes =
Uncertainity
Anticipated
returns
Risk Adversity of
Team
Fit of Team
Competencies
with Venture
Chapter 6: Figure 6.1
Decision
New Venture
Choice
Decision
Attractive
Venture
Opportunity
Technology Ventures: From Idea to Enterprise
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Risk and Return
Economies of scale are expected based on the
concept that larger quantities of units sold will result
in reduced per-unit costs.
Scalability refers to how big a firm can grow in
various dimensions to provide more service.
Question:
A new firm plans to develop and sell a database offering information on
college admissions and selectivity. If successful, will this firm expect
economies of scale and scalability?
Chapter 6: concept
Technology Ventures: From Idea to Enterprise
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Risk and Return
Network economies arise in industries where a
network of complementary products is a determinant of
demand (also called network effects).
+
The reinforcing
characteristic of a
positive loop
exhibiting network
effects.
Wide visibility and recognition
of the value of the network
Re-enforcing
Loop
+
Utility (Value)
of the network
+
Chapter 6: Figure 6.7
Number of users
on the network
Technology Ventures: From Idea to Enterprise
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Risk and Return
Risk and Return
Higher return & higher risk
of a disruptive application
40
High-return
& high risk
venture
30
Annual
Expected
Return
(%) 20
Moderate risk venture
S&P500 stock
portfolio
Low risk franchise
10
Risk-free T-bill
0
0
Low
Chapter 6: Figure 6.9 – return vs. risk
Moderate
High
Highest
Technology Ventures: From Idea to Enterprise
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Risk and Return
The entrepreneur seeks to manage risks and attain
economies of scale, scope, and networks while achieving
scalability of the business.
Chapter 6: Principle
Technology Ventures: From Idea to Enterprise
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Risk and Return
VENTURE CHALLENGE
1)Describe the major risks for your venture. How can
you reduce these risks?
2)What is the potential for economies of scale and
scope? Is this business scalable?
3)Describe the venture’s potential for creating
network effects.
Chapter 6: Venture Challenge
Technology Ventures: From Idea to Enterprise
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Risk and Return
DVD Video
“Types of Risks”
Jerry Kaplan (Winster)
Chapter 6: DVD Video
Technology Ventures: From Idea to Enterprise