The common perception of entrepreneurs is that they’re massive risk takers. And obviously, deciding to skip on the steady paycheck and invest your time in effort into a project that might not pan out is risky.
At the same time, if you want to be a successful entrepreneur, then a hunger for risk can’t be your sole drive. In fact, to an extent you need to be risk averse, so that you know how to avoid it, and do everything you can to manage the risk as well as you can.
In effect, you need to balance your appetite for risk with your appreciation of what it will cost you if the plan fails. That, in a nut shell, is what risk management is about.
Understanding that to fail is not failure
An important facet of entrepreneurship is the understanding that just because something fails, that doesn’t mean you’re a failure. This is, in many ways, the soul of entrepreneurship – the idea of failing your way to success. And in many ways you can say that many ‘normal’ people don’t accept that idea, while entrepreneurs do.
They are willing to gamble their future to create a better future for themselves.
Why is that important?
Because entrepreneurship isn’t always about taking the gambles that are the most likely to succeed. Sometimes the plan that is less likely to succeed is in fact the better action to take. This is because:
Understanding risk is about weighing it
It’s about potentially only losing a small part of what you have in return for gaining many times over what you could lose. It is also about understanding your chance of success and comparing that to how much you stand to gain.
For example a gamble that has only 10% chance of succeeding, but looks to pay out 20 times what you’re investing is a gamble you should always take. Similarly, if a gamble is a coin toss, but will only pay you out 50% more than you invested is a gamble you should always reject.
This might seem straight forward enough, but many people only look at the payout and don’t take the time to do the actual chance-of-success calculation. Or, when the risk is very big, they do exactly the reverse. They consider the chance of failure, while not considering what they will receive if they manage to succeed.
In this way they end up taking bad gambles and taking on board risk they shouldn’t, while avoiding risk when they should embrace it instead. And down that road ruin lies.
Always have a backup plan
Of course, this means that you can’t just throw everything at a proposition and pray for success. If you accept a plan that has a certain amount of risk means that there is a certain chance it will fail. That is the nature of risk and that is something you have to embrace as an entrepreneur.
What that means, however, is that you constantly need to be making backup plans based on what you will do if this line of attack fails. Naturally, the greater the likelihood of failure, the more you need to plan, but that does not mean you shouldn’t have at least the basics of an idea sketched out if something that is pretty likely to succeed doesn’t.
This is because if eventually a plan will backfire, no matter how certain you are that it will succeed. For example, if you take 5 plans that are 90% likely to succeed, then overall all five plans taken together have a less than 60% chance of success.
That’s almost a coin toss.
And if you don’t prepare for that, sooner or later you’ll be caught with your pants down. It isn’t all that hard to at least have some kind of alternative idea on the back burner and some other direction that you can go in case the plan does not pan out. If you can do that, then you’ll have some direction you can take and you can hit the ground running after a plan falls through.
Risk and uncertainty are part and parcel of entrepreneurship
There is no innovation, development or progress without risk. You can carve that into stone. And being an entrepreneur is all about innovation, development and progress. For that reason, risk needs to be embraced and accepted.
Similarly, when you’re entering into a new enterprise, it is important that you accept that there is a great deal of uncertainty and many unknowns. Some of these predict – the known unknowns – many of them will take you completely by surprise, however – these are the unknown unknowns.
By their very nature, you can’t prepare for them. The only thing you can do is remain ever vigilant so that you might shift them from the unknown unknown to the known unknown category as early as possible.
Because only when you’ve done that can you start working on figuring out how to solve the problem. What is more, if you see the problem before anybody else in the market place has, then you are in a position to turn that problem into an opportunity, by adapting your company and your product to deal with it and getting the jump on your competition.
The risk of not acting
Another aspect of risk that needs to be considered is how much you endanger your position by not acting. If you’re in a fast moving market, that risk can be quite extreme, as you can never assume you’re the only one to see an opportunity. And so, if you do not act, then you’ll have to assume that a competitor will instead.
That is a risk that you always need to consider, weigh and include in your calculation. If you do not take a risk and somebody else succeeds, what will that cost you?
For this reason, it can be the right move to start moving towards being able to act, even when right now you’re not in a position to commit the resources. In other words, by finding the resources in some way or form – possibly by partnering up with others, or finding investors.
Because sometimes not acting can be far more risky than acting.
This is what Howard Stevenson, a custom writing specialist and a professor at Harvard Business School, calls “the pursuit of opportunity beyond resources controlled.”
There is another area in which you should always be away of what the risk is of not acting and that is when you don’t decide to become an entrepreneur. Because though there is a risk in any venture you might start out on, that risk is also an opportunity to learn, grow and learn how to do things better in the future.
In this way, even if a project fails, you’ll still have all that knowledge and all that experience. Nobody can take that away from you. And in that way you’ve become more and better than you otherwise would have.
And that means that the next project you decide to embrace and the next venture you decide to engage upon will be that bit more likely to succeed. Sooner or later, you’ll have enough experience and know enough of what to do and not to do, to get an idea off the ground and a business going.
That is something that never would have happened if you wouldn’t have tried.
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