Everyone wants to be an entrepreneur, everyone wants to head out and start their own business venture. Well, maybe not everyone, but if you’re reading this, you probably do. What most people don’t realize, however, is that when you decide to start your own business, a lot is on the line. 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 slim chances, 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 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 little reward, too. It’s no mystery that the higher stakes mean higher gains. The point is…
The 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 of 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? 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 we do this effectively? 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
Competitive risk describes the probability that competition (whether direct or indirect) will affect the revenue of your business. Naturally, this is a fairly high risk for startups, since you’re going to have competition 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
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, but you should at least develop a few strategies and sources that can keep you informed about market activity so any major changes don’t blindside you.
Credibility Risk
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 risk 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 and 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 that there is a correlation between a willingness to take risks and higher personal satisfaction.  If you’re a risk taker, both in your personal life and your 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. Amazon, Apple, Microsoft, Tesla… they all took risks early on, and look at them now.
Andy Braddell is a financial analyst and instructor. He enjoys using what he’s learned from 10 years of studying business and money to help others achieve financial stability.
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