How Should An Entrepreneur Handle Risk?
Everyone deals with risk on a daily basis. Sometimes it gets us, sometimes it doesn’t. Entrepreneurs deal with risk on a daily basis, and how they deal with it can mean the difference between success and failure. I was recently asked some questions on the topic of risk as an entrepreneur and here are my answers. Please leave your own thoughts/answers in the comment area at the end.
1) How do you tell if you’re avoiding taking a big risk? What does anxiety, discomfort, or even depression tell you about your risk capacity, and can/should you overcome these feelings?
I’ve been an entrepreneur for 15 years and I can definitively say that every major mistake I’ve made has been preceded by a warning from my gut. I’ve learned to listen to those feelings and harness them, rather than overcoming them.
2) How do you figure out what’s holding you back – what are you afraid of?
As soon as I feel hesitant about something, or if I notice I’m avoiding something, I pause, and name the fear. Once it’s out in the open, I can analyze it and see if the fear is justified or not, and then take the appropriate action.
3) How do you know if your fear is justified or if you’re looking for excuses to avoid risk entirely? How do you rationally evaluate whether the risk is worth the reward or possible loss?
I remove the emotion from the decision by focusing on data and numbers. It’s true that sometimes numbers don’t tell the whole story, but I’ve found that when I tell this to myself, I’m likely rationalizing a bad decision.
4) What techniques can you offer for evaluating risk vs reward?
One tool I use is to ask whether I would spend the money in my personal bank account on the risk in question. If the answer is yes, then the next question I ask is whether I could convince my spouse to spend the money in our personal bank account on the new venture. If I can’t answer a confident yes to both questions, I know the matter needs more scrutiny.
More recently I’ve brought on a partner, and asking my partner for his opinion on risk and sharing the decision making has helped immeasurably.
5) Do you have a personal story of risk taking to share? How did you find the courage and help you needed? How did you deal with naysayers?
In late 2012 I had an idea for what I thought was a brilliant marketing campaign. It was a major financial commitment, adding up to roughly 10% of our annual revenues, but I was convinced it would pay off. There were naysayers, but I ignored them. The way I figured it, if we got just a single new client from the campaign, which would target roughly 200 potential clients in a certain segment, we would break even. If we got two clients, the campaign would be wildly profitable. We ran the campaign, and the surface response was tremendously positive. Potential clients were so thrilled with it I was getting hugs when I saw them. But in the end not a single client signed up. The campaign failed at its ultimate goal. In retrospect, had I followed my own advice above to analyze the data, had I had a partner then to challenge me, or had I taken a deeper look at spending that money, I would have made a different choice. Success comes from learning when not to take a risk just as much as when to take another.
How do you deal with risk as an entrepreneur? What lessons have you learned about risk from your experiences?