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Summary

This chapter explained that new ventures face technical, market, and competitive uncertainties that require you to undertake risk management activities. You can reduce the risk that your new venture faces by searching for additional information, minimizing the magnitude of investments, and by maintaining flexibility. You can reallocate risks to those parties better able to manage risk or who seek risk. This includes such actions as transferring risk to diversified investors, reallocating risk to experienced or specialized stakeholders better able to manage it, shifting risk to those parties for whom the activities are less risky, and shifting risks to risk seekers. You can also manage risk by legitimating your new venture. You can do this by obtaining endorsements from representatives of the status quo, adhering to established rules and norms, and by engaging in collective action.

Successful entrepreneurs use two financial tools to evaluate opportunities: real options and scenario analysis. Real options help to make accurate decisions under uncertainty by not requiring the evaluation of things that are truly unknown and by permitting evaluation in successive stages. Scenario analysis helps to make accurate decisions by allowing evaluation in terms of ranges rather than point estimates and by allowing the identification of key assumptions about the relationships between variables.


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