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Weighing the Risks of Next-level Growth

“Weighing the Risks of Next-level Growth”

How to conduct risk analysis when your company is under fire.

You’ve moved beyond startup to become a viable second-stage business. Now comes the real risk.Next-level growth requires bigger investments than you’ve taken before. With a larger head count and greater debt, you wager on rapid expansion and its projected payoff.

Although founders of fast-growing businesses manage risk in a variety ways, they aren’t foolhardy. They don’t dive in blindly without weighing the consequences.

Conduct the right research

You’ll need help calculating risk, so collect input from a wide range of sources. Just because your management team, spouse and friends support the risks you plan to take doesn’t mean you’re home free. Seek views of customers and potential customers, professional advisers (such as attorneys and accountants) and mentors who can provide dispassionate business analysis.

Better yet, it pays to contact three CEOs of noncompeting companies who’ve ascended to the next level. Explain that you want to share ideas, seek advice and learn how they’ve built their businesses. As these executives reflect on the risks they took, you can learn from their examples.

Overcome the obstacles

For a second-stage company, risk analysis revolves around a moving target. Your company is changing so fast that today’s prudent move may prove reckless tomorrow as a volatile economy or churning marketplace suddenly upends your goals and priorities.

To complicate matters, business owners rarely can afford to operate in a calm, deliberate atmosphere. Indeed, most risks are confronted under pressure. And CEOs often lack the opportunity to detach themselves from the daily hubbub and gain perspective. They rush into risks with a now-or-never mindset.

Then there’s the data crunch. To weigh risk properly, you must absorb tons of information, from internal rate-of-return computations to economic forecasts to consumer tastes. CEOs must fight the twin anxieties of deciding what to do without all the data they would ideally like — and making sense of the contradictory information they already possess.

In the face of all these obstacles, you need a set of core beliefs to guide you. That means knowing which questions to ask and accepting answers that may seem ambiguous. As long as you define clear goals and plan for unexpected costs along the way, you prepare yourself for a wide range of outcomes.

For example, Nicholas J. DelTorto, CEO and co-founder of Amerihome Mortgage Co. LLC, grows his company by opening additional branch offices. DelTorto evaluates whether to approve a new site by calibrating the investment. He projects revenues for each new branch and predicts when he expects to recover his initial investment. He’ll keep expenses low during that time and only pour more resources into a branch office after it proves successful.

Writer: Morey Stettner, a management writer and trainer in Portsmouth, N.H., is author of “Skills for New Managers” (McGraw-Hill, 2000). stettner@attbi.com

CEOs Making it Happen: Managing Risk

Wild risk, huge rewards

When it comes to managing risk, Heather Howitt admits that her long-shot gambles could have backfired and killed her company.

But they didn’t. Oregon Chai, the Portland, Ore.-based company that Howitt founded in 1994, generated $25 million in sales in 2002.

Howitt spent half of her first Small Business Administration loan of $50,000 to pay an ad agency to create a logo and design packaging and point-of-sale materials. Then she committed the other $25,000 to the same agency to develop ad campaigns.

“My partner, who is my mother, thought we needed money left over to produce product,” Howitt recalls. “She said, ‘Let’s build up locally first.’ But I was impatient.”

Another example of Howitt’s “do it 100% or not at all” approach to risk:investing $250,000 in her first product run.

“I was rolling out a year’s worth of inventory nationwide on a completely unproven product — chai — producing something that expires within one year. And I was using unfamiliar packaging,” she says. “I should have been more cautious. But I was so passionate about chai, I felt everyone had to have it!”

The result: Sales soared 500% in the year after her nationwide rollout.

Thinking like an outsider

For Nicholas J. DelTorto, risk-taking involves prudent financial analysis. A venture-capital firm held a minority interest in his company at its inception, and as a result, DelTorto learned to think like an outside investor.

“I saw the need to look at risk as a venture capitalist would,by assessing the accounting aspects and the rate of return given how long it’ll take to recover a specific investment,” he says. “I keep emotion out of it.”

DelTorto, president and CEO, co-founded Amerihome Mortgage Co. LLC in 1997. Since then, he has built the Brookfield, Wis.-based firm into the 19th largest mortgage broker in the United States.

As CEO, DelTorto recognizes that risk is important to growth, but “as a small company, we can’t afford to make any bets that go south.”

Trust instinct — and passion

Tracy Porter Tracy Porter follows her gut and her passion — two factors that have successfully guided her to assess risk.

Producing hand-painted furniture and accessories, Porter launched her company in 1991 and quickly built a thriving business. Yet the company faced a colossal risk in the mid-1990s.

“We wanted to focus on what we enjoyed — design and marketing — not manufacturing,” recalls Porter, CEO of Princeton, Wis.-based Tracy Porter Inc. “To do that, we shifted from manufacturing to licensing — a huge risk.”

By no longer manufacturing its products, the company had to replace a steady stream of sales dollars with less-predictable licensing dollars: “We knew we’d lose some control of our customers because we wouldn’t be selling directly to them anymore,” explains Porter. “We also had lots of money wrapped up in inventory, and we worried how the marketplace would perceive us for pulling out of manufacturing.”

Yet the risk paid off. Porter’s company has grown about 30% a year for the past six years.