Risk-taking in business. This is how you deal with it.
Risks surround entrepreneurship. But what not in life? If you want certainty, you definitely shouldn’t start doing business. However, if you “cannot” do anything else, it is useful to know how you deal with risk taking in business.
Table of contents
- Strong growth in the number of budding entrepreneurs
- A wish is not yet a choice
- A “Startup” Means Taking Risks
- However, forming a startup is not easy, and it’s certainly not RISK-FREE.
- There is a direct relationship between risk and reward.
- Stay informed and stay ahead of the curve!
- Tips to better deal with risk-taking in business
Strong growth in the number of budding entrepreneurs
The Economic Institute for Small and Medium-sized Enterprises once calculated that 2 out of 3 people consider starting their own company an exciting career move. That will certainly not diminish in the future.
Self-employment or entrepreneurship is on the rise! Yet, it remains a risky business; according to a Statistic Brain study, 46% of companies fail due to incompetence. Moreover, only 40% of small businesses are profitable. So, 60% has no success. That doesn’t sound like a smart risk.
A wish is not yet a choice
Did you know? Only about 10% of the people start a new venture. So, that is a relatively small number. If so many people find it an exciting career step, what stops those from putting their money where their mouth is?
Admittedly, a positive image of the success of a new venture is not yet a real wish to become an entrepreneur, let alone a choice. That’s an important distinction. Apparently, only one out of ten dares to take the step to independence despite the fear. The frightened nine out of ten embrace the status quo and prefer the safety of their comfort zone.
Risk-taking says something about your willingness to take risks. The entrepreneurial attitude deals with uncertainty and accepts that you could lose money, freedom, or reputation. So, if necessary, you must be able to make your loss on time. Risk is part of doing business, yet it is strongly related to the person who perceives it. Do you have the confidence and the courage to make a decision? Some people make the decision without any prior knowledge or risk assessment. That’s being reckless. Others try to get as much information as possible, yet they don’t fail to decide when the time comes. That’s called calculated risk taking or risk management.
For example, some things may seem risky investments to some, but hardly taking risks to someone else. Are you someone who mainly sees problems? Someone who raises obstacles? Do you see the risks more often than opportunities? You probably suffer from risk aversion. In this blog, you will learn how you best deal with risk-taking in business.
A “Startup” Means Taking Risks
If you have a business idea or innovation and want to become an entrepreneur, you need to be ready to throw it all on the line. It’s that simple.
If you’re reading this, you probably made the decision to become a small business owner. What most people don’t realize, however, is that when you decide to start your own business, you’re taking a huge risk. You’re putting your career, your finances, your mental health, and often your reputation at stake.
Don’t get us wrong, starting your own business is an incredible thing. It gives you the power to shape your own destiny. It gives you a degree of autonomy over your life that most people only dream of.
However, forming a startup is not easy, and it’s certainly not RISK-FREE.
That doesn’t mean gambling your finances or your efforts on a slim chance, but if you want to be an entrepreneur, you need to be willing to take risks. You need to be ready to put stuff on the line. Simply put, there is no path to successful entrepreneurial endeavors without risk.
That’s because with business risk comes opportunity. If you want to sit in a cubicle counting beans for the rest of your life, go ahead. There is little risk in that, but there is a little reward, too. It’s no mystery that the higher stakes mean higher gains. The point is…
There is a direct relationship between risk and reward.
When you have a bigger potential upside, you also have a bigger potential downside and vice versa. The trick to becoming a successful entrepreneur is to navigate these risks. To take the ones you can afford and skip the ones you can’t.
In that sense, entrepreneurial endeavors are all about risk management.
What is risk management, you might ask?
Well, to put it simply, risk management is the concept of analyzing potential risks and then figuring out how to mitigate them as much as possible in a cost-effective manner.
So, how do you do this effectively? How to be a smart risk taker? There are a few key points to keep in mind:
- Assess your Potential Risk Tolerance
- Start Small
- Be Aware of the Worst-Case Scenario
- Practice, Practice, Practice
- Observe and influence the Risk Pitfalls and Outcomes
- Minimize Losses When They Occur
There are many “risks” we might encounter as entrepreneurs. Let’s break down a few of the major categories.
Competitive risk describes the probability that competition (whether direct or indirect) will affect the revenue of your business. Naturally, this is a huge risk for startups since you’re going to compete with companies that are already well-established in the market. Minimize your competitive risk by doing a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats, look it up if you aren’t familiar) to brainstorm strategies in advance.
Market risk, also known as systemic risk, is what we call the risk of loss in your business because of market fluctuations. This isn’t something that you can easily mitigate because it depends on the market. Still, you should at least develop a few strategies and sources to keep you informed about market activity, so any major changes don’t blindside you.
Credibility risk is the risk that we face when we market a new product or service. Brand credibility is critical to longevity and will greatly influence purchasing decisions. To mitigate credibility risk, focus on quality over quantity and steer clear of sketchy business transactions. Above all, make customer service a priority!
These are just a few of the many types of risks you’ll face. Others include technology risk and financial risk, but there are many, many more.
Stay informed and stay ahead of the curve!
How much is a good amount of risk? It’s not as simple as numbers. It’s a game of quality over quantity. You need to take the RIGHT risks. The ones that you can manage, the ones that you understand. The ones you can protect against.
Most importantly, you can LEARN even if your risks don’t pay off.
We wanted to have a real thought from experienced people. When we asked Eric Porat, who is an online entrepreneur, he added: “The optimistic risk-taker always looks at failure as an opportunity to learn. Willingness to go out on a limb and experiment with new ideas is critical to growth. If you’re just doing something everyone else has done before, you aren’t really going to rise above the crowd, right?”.
Remember: failure will almost always teach you how to think and plan strategically.
What’s more, risk-taking actually correlates to increased satisfaction! A recent study documenting risk-taking found a correlation between a willingness to take risks and higher personal satisfaction. If you’re a risk taker, both in your personal life and professional life, you’ll learn to look forward instead of backward. Furthermore, you won’t spend your personal or professional life wondering “what if.”
Perhaps best of all, you may just hit the big time. Whether it is the founder and CEO of Amazon, Apple, Microsoft, or Elon Musk of Tesla… they all took risks early on, and look at them now!
Tips to better deal with risk-taking in creating a successful business
- Make a calculated risk or risk assessment: Write down all the dangers you can think of.
- Don’t be humble about that; think of as many risks as possible.
- The secret of that is you write it off you.
- Then write about the consequences of each risk when it would become real.
- Also, not only indicate the biggest risk but also what type of risk it is; financial, emotional, or personal.
- Then consider every risk. If necessary, try to increase the feeling that you experience. Enhance the feeling and ask yourself: How bad is it when it would become a reality?
- What alternative can you offer? What other options do you have?
- Example: “I can lose my house.” Of course, you don’t want that. But how bad is it really? You can rent something smaller, maybe – no matter how bad – you could live with your parents or close friends. It only makes you stronger. There is always a solution or way out!
If you do not risk anything, you risk even more.Erika Jong – American author and educator
Read more about entrepreneurial attitude and mindset in the blog: the difference between skills, abilities, knowledge, and competencies.