A key ingredient of entrepreneurship is risk. Doing things differently, inventing and producing different things, and providing different services… all this entails risk. Entrepreneurs invest in doing things differently and the outcomes of this investment are unpredictable. In fact, these investments are more likely to fail than not.
Governments stifle entrepreneurship in Africa through policy and legal frameworks that upset the risk-reward balance. They create unnecessary barriers to entrepreneurial activity, either by making things too risky or trying to ensure success.
When entrepreneurship becomes too risky, due to the lack of public provisions that provide social and financial protection should an entrepreneurial venture go wrong, potential entrepreneurs play safe and stick to the conventional ways of doing things. In such instances, entrepreneurship and innovation is limited to those with deep pockets who can gamble their resources in the hope for greater reward. However, many people in Africa do not have the resources to gamble in this way. The poor are typically averse to risk because they are more vulnerable. Failure hurts more when you don’t have sufficient resources to fall back on. As a result, too much risk dampens entrepreneurship.
On the other hand, the removal of risk also upsets the risk-reward balance. Risk is an essential element in the entrepreneurship dynamic. It encourages the entrepreneur to take care when considering new ventures and not to go headlong into such ventures without research and assessment. Risk moderates our appetite for reward.
Removing risk creates an attitude of entitlement and erodes the entrepreneurial spirit. Where there is no risk, projects are entered into with little planning or care. Failure is of little consequence because there is no pain associated with it. The removal of risk encourages ventures that are poorly planned and reduces commitment in the project. The lack of risk implies that someone else––usually government––is picking up the tab for failure.
Ultimately, the decision to invest in new products, services or processes comes down to judgement. The entrepreneur knows there is a lot of risk associated with her untested venture, but she takes the decision to try. She will do what she can to reduce risk and to reduce her vulnerability to the impact of failure on her and her family’s wellbeing, but she will decide it’s worth a shot. It will be worth it, in her calculation, because the potential reward is high. Doing things different will change the game and she will be a leader in the new game. She will enjoy financial rewards and possibly greater social status.