Starting a business requires smart risk-taking

Q: "Did you see that that fancy new organic grocer is closed? How long were they open, 4 months? I can't believe it – they must have sunk a million bucks into that place." — Jay

A: More like $2 million.

For the past few months, in the downtown neighborhood where my office is, folks were all atwitter about the new startup market that was moving into the old warehouse on the corner. Apparently, they were going to challenge the Whole Foods market that sits a few blocks away.

The new grocer seemed to spare no expense. Even before opening the doors, they rented several offices in my building for back-end support, the warehouse was gutted and completely remodeled, the logo and branding were top-notch.

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After the hoopla around the grand opening died down, my youngest daughter, who was working as my assistant this summer, and I went over the place for lunch a few times. It was unbelievable:

• The prices were unbelievable — unbelievably expensive. If you think it's pricey to shop at Whole Foods, your toes would curl at the prices this place tried to charge.

• I couldn't believe how little food and produce the place actually stocked. Have you ever walked into a convenience store, only to be surprised at how few shelves it has, how empty and cavernous the place feels, and how little inventory is there? Well, that was this place, times ten. And overpriced to boot.

• They had unbelievably bad service. Not enough help and employees not trained well.

If you think about it, this was really a bad idea for a business. In theory, going up against a market leader like Whole Foods might be a good idea, but only if you can do it right and offer something the leader does not offer – better prices, better selection, better location.

Our new market was worse at all three of these things: More expensive, worse selection, mediocre location. And clearly they tried to take on the lead! er without the capital needed to do so. One time I went in there and the deli counter was closed. I asked an employee, "What's up with that?" and he said they couldn't afford to buy meat that week.

It's bad enough to start a business with a bad plan and lacking even the money necessary to implement that bad plan, but in this case, what really galls me is that the business geniuses behind this startup dropped $2 million (per the local papers) on this ill-conceived behemoth.

Look, we all know that entrepreneurship requires risk-taking. And that's a good thing, because risk is where the juice is. Risk makes the small business game more fun. Big risks can lead to big rewards.

But not all risks are created equal.

One thing I have learned about great entrepreneurs over the 15 years I have been writing this column is that they are smart risk takers. Sure, they know there are times for big, bold risks, heck they would not be where they are if they didn't take a huge risk or two at some point or another.

But usually, the big bet is preceded by a series of smaller, far more prudent risks. The small risks set up the big risks. Small risks are used most often to test the waters, to see if the idea works in the marketplace as well as it does in the entrepreneur's head. A smaller risk can be used to refine an idea, to get it ready for it's close up, to hone it until it is time to roll it out big. And by then, it won't seem like such a big risk anyway after all, because the entrepreneur has tested the idea, knows what to expect, and is prepared for any eventuality.

But dropping a ton of dough (or time or reputation) on a new idea that hasn't been fully vetted? Count me out, and I hope we count you out too.

Today's tip: The Hartford recently launched its Small Business Success Study, and it offered up some pretty interesting results:

• Not surprisingly, 63% of small business owners would not take a job working for someone else – even if they knew they could be just as! successf! ul.

• And when the owners says that their business is going well, that number jumps to 82%

• Of those small business owners who are well-informed about the Affordable Care Act, 38% say they plan to stop future hiring.

Steve Strauss is a lawyer specializing in small business and entrepreneurship. His column appears Mondays. E-mail Steve at: sstrauss@mrallbiz.com. An archive of his columns is here. His website isTheSelfEmployed.