The sheer thought of taking a risk can be intimidating. Engaging in risks means there is a chance of not achieving the desired results. Of course, nobody wants to fail. Yet, the consequences of your actions can’t be predetermined.
On the flip side, risk-taking can also lead to immense success and unforeseen opportunities. It helps you learn and build confidence.
Whether to play it safe or roll the dice is a dilemma many of us find difficult to resolve.
When it comes to entrepreneurship, risk-taking is inevitable. It’s a fundamental part of entrepreneurship, as the competition is high. By taking risks, you make way for progress.
As Peter Thiel has once advised Mark Zuckerberg:
In a world that’s changing so quickly, the biggest risk you can take is not taking any risk.Peter Thiel
What is Risk-Taking in Entrepreneurship?
Risk in business refers to a degree of uncertainty that can lead to financial losses or undesirable outcomes.
A common trait among entrepreneurs is perceived to be risk-taking propensity. According to a study from 2019, entrepreneurs have a greater tolerance of risks than others.
The very definition of entrepreneurship suggests the potential of risk. The activity of starting a business, innovation, and making business choices is a risk in itself.
Entrepreneurs often attribute their success to making a decision that is tied to uncertainty. Throughout their ventures, they are confronted with decisions that involve risks. However, entrepreneurs don’t risk harming their businesses without considerable thought. Big decisions should be made in a calculated manner.
Common risks that entrepreneurs face are:
- Financial risk
- Career risk
- Opportunity risk
- Market risk
- Reputational risk
- Technology risk
- Health risk
5 Types of Risk-taking
- The risk that is not yours to take: there are decisions that you don’t have to make and can instead delegate them to a partner who is better positioned to handle them.
- The unnecessary risk: you take an unnecessary risk when you act on impulse without thinking it through. If you take on risks when you’re not clear-headed, you’re much more likely to fail.
- The risk you can afford to take: in this case, the drawbacks of the risk are limited while the likelihood of success is high.
- The risk you cannot afford to take: you can’t afford to take a risk that threatens the operation of your business. If you dedicate all your resources to a single project and it fails, you’re left with no funds to maintain your business.
- The risk you can afford not to take: this is the kind of risk you can’t avoid if you want to achieve your goals. It’s a necessary element of your venture and one that pays off.
Tips for Smarter Risk-Taking
Test Your Idea
Millions of businesses are set up each year, yet half of the small businesses survive past the 5-year mark. The first risk you take as an entrepreneur is to turn your startup project into a full-time job. Numerous factors can cause a business to fail. But many entrepreneurs make the mistake of rushing into launching without testing their business idea. It’s a high risk that might not be worth taking.
This is not to say, you should get into the trap of perfectionism – not being able to move past the ideation phase. Perfection doesn’t exist and if you feel ready, then go ahead! Yet, cautiously considering different aspects of your idea is certainly smarter than overlooking it.
Consider the Worst-Case Scenario
If you’re thinking about taking a risk, it’s tempting to only focus on the best-case scenario especially when you’re an optimist. This is a great attitude to have because you need to have faith in what you do to succeed. Though, to handle that risk, you can’t neglect the worst possible outcomes.
By assessing the worst, you can identify weak points in your decision and thus, reduce the risk involved. If you pinpoint where your initiative is vulnerable, you can better determine if the risk is worth taking. Then can adjust it for a higher chance of success and prepare for negative consequences. For example, re-evaluating your budget or reviewing your insurance.
Talk to Experts
Talking to experts in your field can increase your competence and help you become more confident in risky situations. Find a mentor you can discuss your concerns with. They may have experienced both positive and negative decision outcomes that you can learn from.
You can also talk to calculated risk-takers. Do you know people who assume risk and challenge themselves out of their comfort zone? Such people can inspire you and give you their own tips on how to assess and deal with risks.
Have a Strategy
Risks are inherent in business, but this doesn’t mean you should take any kind of risk. You have to be mindful of the nature and extent of what you’re risking and adopt a strategic approach.
Strategic risk-taking demands recognising, analysing and managing the risk. In business, risk management is the process of mitigating uncertainty or maximising opportunities by applying a set of tools and strategies. Manage risks using the 4 main strategies.
- Acceptance: accepting a risk without taking actions to mitigate it. In some cases, investing in risk reduction can cost more than the risk itself. If the risk impact is likely to be minor, it might be best to accept it.
- Transference: a risk is transferred when an external party bears the risk on the organisation’s behalf. In this case, you don’t assume responsibility for the risk. You can transfer the risk to an insurance company or outsource work. Think about what aspects you might be compromising.
- Reduction: the strategy of taking concrete measures to lower risk and minimise severe outcomes. An example of risk reduction is when you diversify your product, service, and staff to appeal to a new or expanded market.
- Avoidance: if a risk is deemed too high, it might be best to eliminate it. The disadvantage of this strategy is that you give up potential benefits as well. Before resorting to risk avoidance, assess the other options.
The Bottom Line
We are surrounded by risks every day. While we embrace this, we should also learn how to respond to risks.
To be a better risk-taker, you need to take strategic steps. But above all, you should overcome your fears of failure and allow yourself to learn and grow.