ENTREPRENEUR SPECIAL................. How the Smartest Leaders Handle Risk (And So Should You)

 How the Smartest Leaders Handle Risk (And So Should You)

8 Tips from a successful entrepreneur and race car driver.

I spend a lot of time wondering about risk--when to take a chance and when to play it safe. I tend to dislike risk, so this is a tough subject for me.

When Tom Panaggio, co-founder of Direct Mail Express (DME) which now employs about 400 people, published The Risk Advantage, I knew I had to talk to him. "I didn't set out to write about risk," he says. "I wanted to write a book applicable to small businesses and entrepreneurs."

But Panaggio is also an amateur race car driver who won a recent race by making an unusual move. "I literally had to drive off the track and put myself in a real risk position to get into the lead," he says. "And it clicked in my mind that whenever we come upon an opportunity, we have to embrace the risk to take advantage of it. That's the difference between asuccessful entrepreneur and one who's unsuccessful or just struggling along."

That doesn't mean that you should always head into the fire, he says. The point is to risk when the possible reward will take you where you want to go. "Successful entrepreneurs embrace risk every time there's an opportunity to follow their strategic plan and move forward."

Here's more of his risk-taking wisdom:

1. Once is not enough.

The act of starting a business is itself a huge leap of faith. Too many entrepreneurs make that leap, land on their feet, and stay cautious from then on, Panaggio says. The truth is you need to keep taking risks if you want to find your company's true potential.

"A lot of consultants and people in the business world have the opposite approach," he adds. "Lower risk, mitigate risk. That's flat-out wrong."

2. Every opportunity comes with risk.

If it doesn't, it isn't a true opportunity. "If anyone tells you about an opportunity with no risk, run!" Panaggio says. "There is no such thing."

3. You need a master plan.

"You have to have a framework for your success, and one piece of that is to have a plan," Panaggio says. "The opportunity you embrace and the risk you accept must fit into that plan, and it has to move you forward. If it doesn't enable you, your customers, or your company to move forward in the direction you planned, there's no reason to take that risk."

4. Don't deceive yourself.

"I've been working with entrepreneurs, and one thing I've noticed is that they're joyfully optimistic," Panaggio says. "It's refreshing to be around them. They have some of the craziest ideas I've heard in my life, yet each of them is 100 percent certain they will work. If more people in Corporate America had this mindset, you'd see an unbelievable amount of innovation."

Nevertheless, Panaggio says, you'll be in deep trouble if you take a risk based on joyful optimism that isn't backed up with solid market research. "You can't have your mother, your girlfriend, and your best friend be your focus group. You're not going to get the straight story."

5. Discuss risk with those who are affected.

Panaggio advises avoiding risks that put your family's financial welfare at risk. Instead, he advocates starting your business while hanging on to your job. "There's nothing that says you can't do both," he notes.

Still, the time may come when you need to step off that financial cliff and hope to fly before you reach the bottom. That's fine, he says, "as long as you've discussed it with your familyand they're in agreement."

6. Sacrifice good for great.

Don't be afraid to risk a successful business if you see the chance to build something that could be much bigger, Panaggio says. This is what he did himself after he and his siblings had already established DME.  "We created our RME division with a specific business plan to provide lead generation," he says. "We were in it three years, and we started to create this other marketing program for financial services professionals. We dabbled in it and had good results."

Even though the original business plan was doing well, test responses seemed to show much greater potential in the financial services products. "So we decided to dump the original business plan and go off in that direction. It could have been disastrous, but the timing was right and it took off." RME became so dominant in its small niche that even today it still has 40 percent market share, he says.

7. Get ready to fail fast.

If you're prepared to embrace risk, you should be equally prepared to change course if thingsaren't going well. "We had a lot of situations where we risked and it didn't work out," Panaggio says. "We had a successful business but were constantly looking at our product and asking 'What other market is there for this? If it works for financial planners, why wouldn't it work for people marketing hearing aids?' So we tried it in the hearing aid market. It didn't work at all. We tried it in elective medical procedures. We tried a lot of things and spent a lot of time, money, and effort on things that didn't work."

And that's OK, he says. "Our philosophy was to fail fast and move on, though that can be a thin edge to walk because sometimes it takes a little time to make something successful. But we had a pretty good sense if something was going to fail. If it did, we didn't dwell on it. We stopped it and moved on to something else."

8. Don't be a prisoner of hope.

A prisoner of hope, Panaggio says, is someone who hopes things will happen, as opposed tomaking them happen. "A winner will have a plan," he says. "Even more important is the execution of that plan. If every day that you're at work, your purpose is to make something happen, you will be successful. That's what entrepreneurship is all about.

BY MINDA ZETLIN