Risk is something that few people enjoy. Sure, there are always daredevils who push things too far, but the majority of people are relatively cautious. And while there’s something to be said for protecting yourself, successful entrepreneurs don’t shy away from risk altogether.
The Role of Risk in Entrepreneurship and Business
When most people think about entrepreneurs, they picture daredevils who are always taking chances to make or break their careers. Naturally, we have this image of gutsy individuals who bet it all on a chance to make it big — but this isn’t usually the case.
According to a study from the University of California and Erasmus University Rotterdam in the Netherlands, many entrepreneurs are driven not by a love of risk, but by loss aversion. In other words, the fear of losing a full-time salary, or the prestige that comes with having a particular job title, is directly correlated to the amount of effort an entrepreneur puts into his work. Interestingly, the research found that entrepreneurs who place a high value on avoiding losses, more than acquiring new gains, work harder and tend to have more success.
“One of the most important traps entrepreneurs fall into is when they’re not experiencing success and they become increasingly willing to take risks because of where they are psychologically,” says Josh Morgan, one of the study’s authors. “One lesson from the research is to be careful when you are behind. It’s not necessarily the best decision to double down.”
You don’t want to eliminate all risk-taking from your arsenal, though. An unwillingness to take any risks will prevent you from ever standing out. You might miss out on three or four chances you take, but getting a single one right can make up for all of the previous losses and more.
“Business risks can move a business forward,” entrepreneur Van Thompson admits. “They can gain the owner a reputation as someone who knows how to make good decisions and accurate business assessments. Entrepreneurs with a well-informed risk-taking spirit might see opportunities where others don’t and might be able to spot trends well before the market is saturated.”
Clearly, balance is required when confronting risk as an entrepreneur. There’s something to be said for avoiding unnecessary risk and protecting what you have. There’s also something to be said for being willing to confront risk in order to potentially see a big return.
4 Tips for Managing Entrepreneurial Risk
Whether you’re a green entrepreneur who is still learning the ropes, or a seasoned veteran with years of experience building out businesses, it’s always helpful to get some education on risk and what it looks like to be strategic in this area. Here are a few smart and practical tips for confronting risk the right way:
1. Surround Yourself With Information
One of the worst things you can do when facing risk is to go with your gut. The idea that you can trust your gut is a piece of advice that people use when they don’t know what they’re doing. It’s an excuse to make bad decisions. And if the decision turns out to be good, it’s an opportunity to brag about your intuition. But in all honesty, your brain, not your gut, is where smart decisions are made. Furthermore, if you don’t have the knowledge or expertise to make a smart decision, you need to surround yourself with people who do.
“When necessary, business owners should hire experts to help them make decisions. An attorney, for example, can advise about the legal risks of business decisions. An accountant can help project potential profits and losses, and industry experts can advise about trends in the field,” Thompson explains. “Business owners are more likely to fail when they don’t have enough information or take risks without first considering all possible alternatives. They should surround themselves with trustworthy people and never make a business decision purely on a whim.”
2. Know When to Get Out
Whenever you enter into a situation that involves risk of any degree, you must have a plan for getting out. More specifically, you need to know when to get out. This is a principle that traders use when making financial investments. Losses are going to happen, but the successful investors are the ones who can accept small losses in order to avoid big losses.
“Small really means getting out of a bad trade as soon as you can,” explains Shane Daly of Netpicks, an investment education and training system for day traders. “That means you might have a set of criteria or are seeing some type of price action which will get you out of a trade before it hits your stop-loss order. It also means no mindlessly clinging to a trade in the red when it’s well beyond your stop, in the hope that it will come back for you. Letting a trade run past your predetermined stop loss is horrendous money management and will cause you to take a loss much larger than you planned for.”
Much like a day trader setting guidelines for getting out of a bad deal, you have to set your own limits and criteria when taking a risk. If you’re investing in a new product, for example, this might look like giving yourself 90 days to market and advertise the product. If you don’t get $10,000 in sales, then you scrap the investment and move on. If you don’t take a calculated approach, you might get hung out to dry.
3. Ensure There’s Purpose Behind the Risk
Risk for the sake of risk is pointless. Unfortunately, a lot of entrepreneurs take risks because they feel like that’s what they’re supposed to do. They’ll use clichés like “win big or go home” as justification for their irresponsible behavior. But taking on risk just because you can isn’t smart at all.
There should always be purpose behind the risks you take. Spend some time writing down the possible outcomes of any risk before taking it on. What’s the best-case scenario? If that scenario were to play out, would you be better off than you are now? Then consider the second- and third-best outcomes. Would they benefit you? If you find that even the best-case scenarios don’t give you that much of a return, the risk probably isn’t worth taking.
4. Don’t Dwell on Misses
It’s impossible to hit on 100 percent of the risks you take. Even if you do all of your due diligence and get advice from the foremost experts in the field, you’re going to experience some degree of failure. The important thing is that you don’t dwell on these misses. The faster you can move on, the better off you’ll be in the long run. One or two misses won’t kill you, but constant dwelling on the mistakes you made will lead you to dig your own grave.
Rumination, as defined by one expert, is “the compulsively focused attention on the symptoms of one’s distress and on its possible causes and consequences as opposed to its solutions.” In other words, it’s what happens when you can’t stop dwelling on a failure that’s the real problem.
The danger of rumination is that you don’t just remember or notice the negatives of a past mistake or failure, but you actually relive and continually experience them over and over again. It’s debilitating and ultimately prevents you from ever taking a risk again.
In order to avoid ruminating, you need to be aware of the fact that you’re doing it. Then, when you have negative thoughts, you have to recognize, edit and replace them. This conscious effort not to focus on negative thoughts will eventually help you avoid these thoughts altogether.
Don’t Automatically Avoid Risk
The key word in the risk equation is balance. Too much risk isn’t a good thing, just as too little risk strips you of the opportunity to be wildly successful. You need to find that happy medium that allows you to achieve optimal results. It looks different for every entrepreneur, but you’ll know when you find it.