I recently watched an interview where the Nigerian industrialist, Aliko Dangote, discussed his experience building the world’s largest single-train refinery in Nigeria. He described how the project started in 2013 and took about a decade before the refinery was commissioned in May 2023. In the interview he said, “If we knew what we are really going to get into, we wouldn’t have started at all.” Dangote goes on to explain how the project experienced a myriad of problems including, political issues with the government, community issues, land issues, and a host of others just to build a refinery.
For example, Dangote had to build a special port and road (from the port to the refinery site) just to receive and transport the equipment necessary to construct the refinery. Some of the equipment weighed 3,000 tons and the existing infrastructure couldn’t accommodate them. He also had to develop the capabilities to provide enough sand and gravel for the project because they couldn’t find a firm in Nigeria that could provide the capacity the project needed. In fact, Dangote had to become the “engineering, procurement, and construction company” for his refinery because he couldn’t find any firms large and capable enough to take on the project.
Was it Dangote’s responsibility to build a port, a road, and effectively create a construction, procurement, and engineering company, just because he wanted to build a refinery? This got me thinking about the job of an entrepreneur. I think, at the core, the job of an entrepreneur is to manage risks impeccably well.
In his Harvard Business Review article, Entrepreneurship: A Working Definition, Harvard Business School professor Tom Eisenmann provides a definition of entrepreneurship (borrowed from another HBS professor Howard Stevenson) as: the pursuit of opportunity beyond resources controlled.
Eisenmann goes on to describe four main types of risks entrepreneurs must wrestle with as they work to build their businesses. They are demand risk, technology risk, execution risk and financing risk.
Demand risk relates to an entrepreneur understanding the Job to Be Done (JTBD) of potential customers and their willingness to adopt a new solution to fulfill the JTBD. This is sometimes referred to as ensuring there is product-market fit.
Technology risk refers to risks embedded in a product or service that requires a breakthrough technology or some sort of scientific breakthrough. For example, the mRNA-based COVID-19 vaccines had significant technological risk as it depended on a scientific breakthrough.
Execution risk is common to all entrepreneurs. This is the adage that talk is cheap. Is the entrepreneur able to attract employees and partners to build a venture that properly executes their plans to solve the customers’ JTBD? Is the entrepreneur able to navigate the unexpected ups and downs of entrepreneurship that are bound to happen as they build the company?
Finally, financing risk relates to the risk associated with the availability of capital necessary to keep the venture going. My late mentor, Clayton Christensen, often explained that a company gets its capital from two sources: investors and customers. It is the job of the entrepreneur to convince the investors to provide enough capital to keep the firm running until the firm develops a viable value proposition for which customers are willing to pay, ultimately replacing the investors as the primary capital providers. There is inherent risk in the convincing and conversion.
It is important to note that all these risks are interdependent. Consider how Dangote’s execution risk impacted his financing risk. After securing loans from banks, the project seemed to stall for more than three years due to execution issues. This had a direct impact on financing risk. It’s easy to see how this delay could have exacerbated technology and demand risk if it was a different sector.
Entrepreneurs must become adept at managing all these risks as failure to do so can result in the firm’s demise.
In growth economies, market-creating entrepreneurs–entrepreneurs developing products and services for millions of people for whom no existing product on the market is affordable or accessible–are more likely to experience these risks.
In our study of 100 market-creating entrepreneurs, we found that almost half had to undertake tasks typically executed by the government. More than 80% had to vertically integrate some component of their business because of the unavailability of partners.
As Stevenson notes, entrepreneurship is the pursuit of opportunity beyond resources controlled. Entrepreneurs in growth economies have few of those resources and even less control. But if risks are managed appropriately, the opportunity is immense.
