1/13
Who is the risk taker in business?
I realize most people even Economists don’t understand risk taking. This thread hopes to bring to fore risk taking in an enterprise.
I will illustrate with an example that is familiar with many of us in Zimbabwe. A diaspora investment
Who is the risk taker in business?
I realize most people even Economists don’t understand risk taking. This thread hopes to bring to fore risk taking in an enterprise.
I will illustrate with an example that is familiar with many of us in Zimbabwe. A diaspora investment
2/13
Imagine a Zimbabwean working in the City in London and earning £10k a month and living a very comfortable life. No serious worries except long hours at work & the occasion rant from the girlfriend.
Imagine a Zimbabwean working in the City in London and earning £10k a month and living a very comfortable life. No serious worries except long hours at work & the occasion rant from the girlfriend.
3/13
They visit Zim one Christmas holiday and meet up with friends. As often happens in these meet up’s- ideas are exchanged and opportunities explored. One of which is a tomato drying factory. Seems like a good idea enough.
They visit Zim one Christmas holiday and meet up with friends. As often happens in these meet up’s- ideas are exchanged and opportunities explored. One of which is a tomato drying factory. Seems like a good idea enough.
4/13
A friend, John, has worked for ten years at one such establishment at managerial level. He has the skill and passion. Trustworthy enough. The fancy cars in Harare give the imagine that money can be made.
A friend, John, has worked for ten years at one such establishment at managerial level. He has the skill and passion. Trustworthy enough. The fancy cars in Harare give the imagine that money can be made.
5/13
Our Londoner goes back to the City & borrows £70k. As a ten year loan. That’s $100k. Enough to capitalize the factory. And enough working capital for a year- until all is set.
Our Londoner goes back to the City & borrows £70k. As a ten year loan. That’s $100k. Enough to capitalize the factory. And enough working capital for a year- until all is set.
6/13
John, the entrepreneur is given 10% as sweat equity in the business. The Londoner gets 90%. John has set targets. Which if met, in five years he will get an extra 15% equity. All are happy.
John, the entrepreneur is given 10% as sweat equity in the business. The Londoner gets 90%. John has set targets. Which if met, in five years he will get an extra 15% equity. All are happy.
7/13
Money hits the account. John signs a lease with a Warehouse owner for renting the space. Goes to China to buy the machinery, hires twenty general factory hands & a supervisor with experience.
Money hits the account. John signs a lease with a Warehouse owner for renting the space. Goes to China to buy the machinery, hires twenty general factory hands & a supervisor with experience.
8/13
Every month;
(i) Salaries/wages are paid in full
(ii) Rent is paid
(iii) Interest for the loan in London is paid by the Londoner.
Every month;
(i) Salaries/wages are paid in full
(ii) Rent is paid
(iii) Interest for the loan in London is paid by the Londoner.
9/13
John, a capable leader provides all comforts for workers. And a bonus scheme based on output. The landlord negotiates a minimal lease price plus a turnover based premium above the minimum.
Everyone is paid. Everyone is happy.
John, a capable leader provides all comforts for workers. And a bonus scheme based on output. The landlord negotiates a minimal lease price plus a turnover based premium above the minimum.
Everyone is paid. Everyone is happy.
10/13
Exactly a year after. The factory is up and dry canned tomatoes are coming out of the factory.
As per projections the business is loss making for three years. Huge marketing costs & penetrative pricing to establish themselves.
Exactly a year after. The factory is up and dry canned tomatoes are coming out of the factory.
As per projections the business is loss making for three years. Huge marketing costs & penetrative pricing to establish themselves.
11/13
After four years. Wages, rent and interest is being paid.
The Londoner uses his salary to service interest. The business cannot afford to pay interest.
After four years. Wages, rent and interest is being paid.
The Londoner uses his salary to service interest. The business cannot afford to pay interest.
12/13
Unfortunately after five years, the business is loss making. Year six, salaries are in arrears. So is the rent.
Creditors eventually foreclose on the business. Some of the creditors include workers and landlord. As well as John. Whose salary was in arrears as well.
Unfortunately after five years, the business is loss making. Year six, salaries are in arrears. So is the rent.
Creditors eventually foreclose on the business. Some of the creditors include workers and landlord. As well as John. Whose salary was in arrears as well.
13/13 The factory machinery is sold off and creditors are paid off. But $25k is still in arrears against the company. Creditors agree to write it off!
Workers complain about no retrenchment package which by law they’re entitled to. The landlord complains about loss of business.
Workers complain about no retrenchment package which by law they’re entitled to. The landlord complains about loss of business.
13b/13
The business failed. Like 70% of businesses do. No fault of anyone.
Who took the risk in this business? Who bears the loss?
Further reading on Risk, Uncertainty & Profit
cdn.mises.org/Risk,%20Uncert…
The business failed. Like 70% of businesses do. No fault of anyone.
Who took the risk in this business? Who bears the loss?
Further reading on Risk, Uncertainty & Profit
cdn.mises.org/Risk,%20Uncert…
For those not clear what risk is. Here is a working definition 
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