The Element of Risk For Entrepreneurs

Everything in life comes with risks attached. If you want to cross the road to go to the local shop there’s a risk that you’ll be run down while doing that. There’s even a risk that if you’re stood still in the local park you’ll be struck by lightning. You cannot avoid risks.

But whereas risk is usually deemed to be a negative thing, the consequences of taking a risk can be positive. There are some risks that you should take if you are an entrepreneur. It’s said that “fortune favours the brave” and often that’s true. If you don’t take any risks, you cannot hope to benefit from the Risk:Reward ratio.

So how do you handle risk?

You need to decide which risks are worth taking and which aren’t. That means evaluating which risks are more likely to pay off. It also means evaluating which risks will have the highest payout if they go in your favour. And it means working out which risks aren’t worth taking a gamble on. That sounds complicated, but it really isn’t. You can minimise your business risks by doing market research. You might be convinced that there’s a market for jet-powered rocket boots but maybe the world isn’t ready for that. Market research can help you determine which risks are worth taking and which risks should be avoided.

It’s also a good idea to talk to friends and family to see what they think about your business idea. It’s easy to be overenthusiastic when you have an idea that you’re convinced is a winner. When that happens, it’s easy to miss the obvious flaws in your otherwise perfect plan. Friends and family can help bring you back down to earth by pointing out the issues that you may not have considered.

But it’s also important to realise that some people are more risk averse than others. Entrepreneurs are natural risk takers whereas people who aren’t entrepreneurs tend to avoid risks. Listen to what your friends and family say about your ideas, but don’t assume that if their response is negative that’s a guarantee that your idea cannot work. 

When Sir Clive Sinclair - one of the pioneers of home computing - launched his Sinclair C5 in the mid 1980s, people laughed. Admittedly, the C5 didn’t prove to be a success. But hybrid bicycles using a combination of electric motor and pedal-power are now commonplace, as are electric vehicles. Sir Clive got the timing wrong because the world wasn’t ready for his C5. His C5 had a number of design flaws. But the concept was a good one.

You can also minimise your risks. If you decide that the world is ready for jet-powered rocket boots you could manufacture millions of them and wait for the orders to come flooding in. But a more sensible approach could be to manufacture a much smaller number of units so you can test the water first. By doing this you tie up less of your capital and if things don’t go according to plan it’s not the end of the world.

Should you take risks?

 The short answer is yes.

 The business world is full of examples where taking risks went spectacularly wrong. In the 1980s, Coca-Cola risked its brand by introducing New Coke, for instance. Coca-Cola was worried that Pepsi was starting to make serious inroads into its market share so it had been forced to react.

 But New Coke was a failure. Despite the market research in the run-up to the launch, consumers hated it. There’s a lesson to be learned here. Coca-Cola put its neck on the line and took a risk. But the company monitored the situation and once it became clear that it wasn’t going well, the company cut its losses.

So you should definitely take risks. But you should make sure that the risks you take are the ones where the odds of success are stacked in your favour. You should ensure that the risks you take are the ones where the rewards if they pay off are likely to be meaningful.

Most importantly, once you’ve decided to take a risk you should constantly monitor the situation because if it becomes clear that things are not going according to plan, cutting your losses can prevent a mild inconvenience from becoming a disaster. While fortune definitely favours the brave, it also favours the realist.

Words by Connor Maxwell