Why Great Leaders All Think Like Entrepreneurs 

(and Not all Entrepreneurs are Great Leaders)

A standard definition of an entrepreneur is someone who starts and grows a business. Given the significant odds of failure, it’s not surprising that those who launch successful companies become folk heroes and sometimes even celebrities.

It may surprise you – and perhaps inspire you to know that being an entrepreneur has nothing to do with whether or not you start a company. It has everything to do with how you think and approach business. The essential characteristics that define a successful entrepreneur make a good business leader.

I had dinner with a well-regarded and often cited British some years back. I shared with him this concept – wondering what his opinion might be. To my surprise, he told me that, while he had never considered entrepreneurship this way, he felt it was exactly right and that, moreover, it is a useful way to think about business as a leader.

To understand the principles, you need to start with a basic assumption about business in general. More specifically, how free-market business operates in a capitalist system. Any business’s ultimate success or failure has little to do with how hard you work, how clever you are, or even whether you are lucky enough to be in the right place at the right time. All those things might contribute to the fate of your company. Still, the ability to maintain success, which in reality amounts to maintaining a sustainable competitive advantage, comes down to how well you leverage and manage risk.

…being an entrepreneur has nothing to do with whether or not you start a company. It has everything to do with how you think and approach business.

The reason most new businesses fail is primarily a function of the risks involved. One cannot guarantee success in a free market. You might get lucky enough to beat the odds on a pure crapshoot, but if you continue to gamble, you will invariably see your luck and your business disappear.

And, yes, some businesses fail for other reasons too. You might lack the funding, knowledge, or skills to succeed. You might just have a terrible idea or lack the dedication to provide and maintain the effort needed to persevere. But, while there are many reasons a business fails, there are a few tell-tale signs of what creates a sustainable competitive advantage. These signs point to your ability to understand and manage the risks inherent in your enterprise and exist for every business.

Capitalism is rooted in the principles of investment. You risk your capital to hopefully realize a worthwhile gain where investment might represent money or some other tangible asset or your time and effort. The economic principles that apply to any sort of financial investment apply directly to every business.

First, risk and reward are intrinsically tied together. You should generally expect a low yield from a low-risk investment. There are many benefits to low-risk investments as a means of preserving and slowly growing wealth. In a business, it is impossible to eliminate all risk and realize any profit. (We’ll get into why a little later on.)

Conversely, the pursuit of high yields attracts investors into high-risk investments. No sensible investor would place their capital into a high-risk situation, where there is a high likelihood of losing that capital, were it not for the potential of a sizeable return.

High-risk investments begin to resemble gambling, but there is a critical difference. Gambling is a level playing field. It offers no significant benefit on the basis of skill or know-how. You might be able to judge when to stop or get out or hedge your bets and choose to avoid betting on things that make no sense to you. But in the end – it is purely a game of odds – and mathematically, the odds in place remain constant. You have no control over them.

Not all high-risk investments are unwise though. Entrepreneurs are those who are willing to bet on low-probability outcomes believing they can beat the odds. They recognize that risk is a variable function of business. Threats and opportunities are constantly in flux, and managing them requires a combination of vigilance, competence, timing, and luck.

Successful serial entrepreneurs develop a level of competence in assessing the changing risk profile impacting their venture and are prepared to adapt quickly while continuously improving their performance. They do not eliminate the risk; they manage and work with it. And because the risk keeps most people from what they pursue, when they do succeed, they remain clear of competitors who would take their share of the rewards.

In this regard, successful entrepreneurs are savvy investors. They differ from professional investors because they are laser-focused on a single opportunity and willing to bet everything they have. An experienced investor might be smart to diversify, even within a target industry or market. But the entrepreneur wears blinders and cannot afford to waiver in her commitment.

Not all high-risk investments are unwise though. Entrepreneurs are those who are willing to bet on low-probability outcomes believing they can beat the odds.

Unlike entrepreneurs, professional investors can choose to be risk-averse. Disciplined investors accept losses as a counterbalance to their wins – and respect the value of the risks they take. They study the underlying fundamentals that dictate the risk. They can assess the market, the quality of management (an application of mostly science), the availability and use of capital – and the strength of the organization’s leadership. The old saying is that most successful investors will typically bet on the jockey rather than the horse – especially when the risks are high. That is why you often see large investments follow successful serial entrepreneurs.

There are also so-called “angel investors” who will bet on unproven entrepreneurs and early-stage companies. They are like professional gamblers who make a business of betting.

They are like the professional gamblers that bet on horse racing: they study the underlying fundamentals to manage their risk. Astute racing betters research how certain horses perform in different track conditions, different starting positions, and when ridden by different jockeys. Still, nobody can fully predict the outcome of an honest race, and betting on entrepreneurs is essentially no different. It is like betting on a horse that is driven to win, but unlike that horse, the entrepreneur is also betting on herself.

For any business, the risks involve capital that falls into three buckets.

To manage risk, you must identify and understand it. The old saying goes, the problem you name is the problem you solve. Managing risk is a matter of solving the problems it might cause.

The first is the tangible assets available to operate the business. They include all forms of funds, including cash in hand and money that can be accessed through loans or selling equity to investors. It is the means to buy goods, pay for services, hire workers and establish a location. Most businesses cannot operate without some real capital. You will see this capital identified on your company’s balance sheet.

The other two buckets are intangible:  human capital and reputation capital. It is important to recognize that they are capital, not assets.

I often ask CEOs, “what is your most valuable asset?” They invariably answer, “my people.” And I point out that they are wrong about that. Assets are what you own, and you do not own your employees; you rent them, and they often do tend to be a liability – in more ways than simply owing them a paycheck at the end of each period they work.

You may not own your people, but you own their performance – and you are responsible for it. Unlike machinery, people tend to be unpredictable, inconsistent, and often incompetent. They call out sick, come to work sick when they should stay away – and spread illness, and might lack integrity, interest, or care much about things that matter most to you and your company. The quality of their work product is what is at risk.

Assets are what you own, and you do not own your employees; you rent them, and they often do tend to be a liability

Warren Buffet once noted that to hire good people, you need to look for energy, creativity, and integrity. But they had better have all three – because without integrity, with the other two qualities, they will likely destroy your organization.

Reputation is also intangible capital. Your reputation is formed and held in the minds of your stakeholders. These are your customers, suppliers, industry, community, and employees. Again, you don’t own your reputation; you own the consequences of your reputation.

Reputation is why people transact with you. When your reputation capital dries up, it is not only hard to attract the stakeholders you need; you may likely lose those you might already have.

These three buckets are necessarily linked. Together they form the substance and a flow of fuel to your sustainable competitive advantage and, ultimately, your success or failure.

Reputation is why people transact with you.

Beyond the need to provision the operations of any business organization, without hard capital, you cannot employ good people to work for you for a fair wage. When you can no longer afford to pay for the people you have, you tend to be at risk of losing your highest performers because they are most valuable to the marketplace – and especially to your competitors. Without good people, your work product will suffer. Your reputation will follow, and the revenue stream from those transactions will constrain or dry up the capital needed to replenish the first bucket. It can quickly become a downward spiral that companies never recover from.

Each bucket has inherent risks that you must manage.

Managing your real capital is fundamental to running any business. The availability of cash when needed, or cash flow, is largely a function of good management practices and controls. It is also a function of employing sound strategies around pricing, profit margins, creating and projecting sales revenue, and the availability and use of credit. Your cash flow strategies might be aggressive around promoting rapid growth or conservative towards reducing risk. Either way, it is a management decision.

There are also risks related to external factors that you do not control. These are beyond your direct control and often beyond what you can effectively manage, depending on the resources you have at your disposal. There is always the risk of disruptions to your marketplace, supply chain, or unexpected changes in economic conditions affecting currency valuation, credit rates and availability, and even weather and natural disasters. Any of these things can impact your access to the cash you need when you need it.

Most organizations underestimate what it takes to effectively manage their human capital…

Managing human capital is just as critical but more easily overlooked. Most organizations underestimate what it takes to effectively manage their human capital, relegating the tasks to HR, perhaps providing management training, and offering little or nothing in terms of effective leadership development.

The problem is that you cannot manage people. You must lead them. You can manage the controls, policies, and resources that support and guide your people. Still, their performance will always be a function of their personal capacity to perform and the level of conscientiousness they bring to their efforts. Attempting to control or manage people generally produces the opposite of what effective leadership does to benefit an organization. Incompetence and the dysfunction common in so many organizations are, at the root, a leadership issue. Whenever you notice poor performance on the front lines facing customers, you can trace the problem to poor leadership at the top.

Leadership development reduces much of the risks associated with human capital. Leadership is what attracts and retains top performers by creating a culture that is both diligent and conscientious. Just as dysfunction tends to be contagious, so too is leadership. People with the capacity to be high-performers tend to lead themselves to achieve their potential when in the presence of leaders who exemplify high performance. Poor performers find nowhere to hide and self-select out. Accountability, integrity, and dedication become the foundations of the organization’s culture. The result is a fully competent organization: people take pride in their accomplishments, have a strong sense of duty to the mission, and do not offer or accept excuses.

Managing reputation capital is also a function of leadership. You cannot manufacture your reputation with any of your stakeholders. The best you can do to maintain a strong and durable reputation is to be a high-performing organization. That means being the best at whatever it is you do, continuously improving how you do it, and adapting quickly to the changes and adversity you face – to maintain a sustainable competitive advantage.

Your reputation is a product of your culture, your work product, and your organization’s ability to create value for all of your stakeholders. The greatest risks to your reputation are invariably how your people perform and whether your stakeholders view your leadership as being integral and courageously authentic, meaning that you are serving a good greater than the needs and interests of the organization itself.

The greatest risk to your reputation is that it is difficult to establish a strong reputation and easy for it to be damaged. Worse still, it is significantly harder to repair a reputation than to build it in the first place. Your people and their performance must be the stewards of all your relationships, and leadership must make this its top priority.

So, what does this have to do with the relationship between entrepreneurship and leadership?

Going back to the definition of an entrepreneur, it is the relationship to risk, not the age or type of business you are in. As already outlined, profit results from successfully investing capital through a business enterprise. Without risk, there would be no opportunity for profit.

The entrepreneur simply exposes her capital to an otherwise unreasonable level of risk in pursuit of an unrealistic expectation of return. Start-ups fit the bill. They are inherently risky. But even well-established and highly successful organizations benefit from taking substantial risks – albeit without necessarily putting all the chips on the table. They do this by cultivating innovation, pursuing new ideas, embracing uncertainty, and investing in the development of their people. Doing so takes courage and leadership.

Without risk, there would be no opportunity for profit.

Great leaders are good at getting comfortable being uncomfortable – and get others to do the same. They are exemplars of the courage it takes to assume and manage risks and implicitly understand that in business, the greatest risk is not taking any.

In this respect, great leaders tend to think entrepreneurially. They are curious and relentless problem solvers that change the trajectory of the future. They courageously disrupt the status quo when it stands in the way of progress.

Unfortunately, not all entrepreneurs are good leaders.

Just having the ability to embrace uncertainty and the appetite for risk does not compensate for lacking the empathy, emotional intelligence, and selflessness that great leaders also possess. The lack of these qualities may contribute to the high failure rate among start-up companies.

There is a final question you might seriously consider if you want to be a better leader. Do you have the capacity, courage, and desire to think like an entrepreneur? If you do, the challenge is whether or not you can make it necessary and possible for others to follow you in the face of adversity and uncertainty. I don’t know of anyone who accomplished great things without having something to lose. Leadership isn’t about playing it safe. It’s about accomplishing what matters most – and while protecting what you have might seem like a good strategy, those who change the world for the better have always looked beyond what we have to find what is possible.