It’s a known fact that over thirty percent of startups fail within two years. This isn’t meant to scare you into avoiding starting your own business, but to showcase the reality of entrepreneurship. Successful entrepreneurship involves taking risks.
Countless entrepreneurs have taken risks to get their businesses to where they are now. Taking risks, however, does not mean going into business blindly and then expecting great results. Instead, successfully approaching risks requires careful planning and an underlying strategy.
Why do entrepreneurs take risks?
Every entrepreneur and small business owner has a different reason for wanting to start their own business. That means that you and every other entrepreneur are deciding to take different risks specific to your idea. However, the actual reason why entrepreneurs decide to take risks can be narrowed down to the following five reasons.
1. You will never know unless you try
Nobody can really be sure if risks will pay off, no matter how calculated they may be. But this should not stop you from taking risks. If you want your business to succeed, risks are necessary. According to a quote by Frederick Wilcox, “Progress always involves risks. You can’t steal second base and keep your foot on first.”
You don’t know how the future will play out or if your business will be successful. However, you can plan ahead to help mitigate the potential for failure. Developing a business strategy, exploring financial scenarios, and revisiting initial performance are just a few ways to help you navigate the unknown. You’ll never know unless you try, and you can at least set yourself up to handle different situations.
2. You learn from taking risks
Some risks may not pay off, but an optimistic risk-taker will always look at failure as an opportunity to learn. Social Media Examiner owner Michael Stelzner writes that the willingness to experiment with new ideas is key to business growth. As he puts it, “nothing ventured, nothing gained.”
Failure will teach you how to think and plan strategically. Just remember that not all risks are good ones, and when you fail, learn from it and adjust your strategy. In fact, this type of thinking should become integrated within the way you do business. Whether you succeed, fail or land somewhere in the middle, it’s important to have a system in place that helps you analyze that performance.
3. Innovation and opportunity are tied to risk
Innovation involves changing how people do things. Combine that with the fact that customers have constantly changing demands and you have consistent opportunities for new business. It is about sharing and teaching what we know and putting new ideas into practice as a constant state of progress.
Business leaders accept risk as a cost of opportunity and innovation. They know it cannot happen if you will not accept the risk that your undertaking might fail. The level of risk may be lessened, however, if you make all possible calculations and evaluate which options are best before proceeding to the next step. The more clearly you can validate your idea or a specific direction, the more likely you are to succeed even if it’s risky.
4. Those who take risks already have a competitive advantage
Since most people tend to avoid risk, those who are brave enough to take risks already have a competitive advantage. Similar to the concept of a first-mover advantage, when most individuals stay away from risk, that means less competition for risk-takers. This means if you’ve found a worthwhile opportunity, and no one else has jumped on it, you’re the only business reaping the benefits and communicating with customers.
So anytime you’re considering taking a risk, keep your competitors in mind. If you don’t take the risk they may opt to do so instead. But as long as you understand the potential return, you can rest assured knowing whether it’s a worthwhile risk or not.
5. Risk-takers may be more content and satisfied with their lives
Most people are not willing to take risks, but a study on risk-taking revealed that there is a link between willingness to take risks and personal satisfaction. You won’t look back and dwell on what could have been or the fear you felt when facing uncertainty. Instead, you know what was on the other side of that “what-if” scenario and can feel proud of the fact that you were willing to take risks to grow your business.
Now again this doesn’t mean you take risks at every turn but instead take calculated risks that have been thoroughly considered. Avoiding unnecessary risks and saying no to new ones based on past experiences can be just as satisfying. Finding the right balance and taking risks when it makes sense, even if there’s a chance of failure, is a sure way to find success and satisfaction.
5 business risks every business should plan for
Risk is often used as a blanket term when describing decisions made under various levels of uncertainty. But keeping the concept of risk so broad doesn’t do you or your business any favors when trying to navigate and make decisions. Instead, you want to understand the type of risk you are taking and how it can affect your business.
Here are the different types of risk you can expect to face as a business owner:
Market risk, also known as systemic risk, refers to the risk of loss due to fluctuations in the market. To mitigate this risk, an entrepreneur should develop and implement various strategies that inform you of potential changes or disruptions.
Known as a market analysis, it’s a process that allows you to explore potential opportunities, challenges, and preferences. The end result should help you better understand your audience, the available market, and if you need to pivot the focus of your product or service.
Competitive risk refers to the chance that direct or indirect competition impacts the revenue or margins of your business. This is often due to competitive advantages in product specifications, price, or marketing strategy.
This type of risk is higher for startups since they usually face competition with companies that have established their presence in the market several years prior. An entrepreneur can minimize this risk by conducting a SWOT analysis and come up with strategies to counter their competitors.
Credibility risk refers to the risk that an entrepreneur faces when putting out a new product or service in the market. The credibility of a brand name helps greatly in establishing a business and can influence the purchasing decisions of potential customers.
According to a study, approximately 59 percent of consumers prefer to buy new products from brands that they are familiar with, and 21 percent report they bought a new product because it was from a brand they like.
To mitigate credibility risk, there are several strategies to consider. These include building a professional online presence via your business’s website and social media accounts, focusing on quality products and services, and avoiding questionable business deals.
Technology risk refers to the risk of losses that business owners face due to technology failures. For example, lost revenue due to the crash of your eCommerce website, a security breach resulting in the theft of customer data, or failing to transition employees to working remotely due to a lack of available tools.
The best way to minimize this risk is to invest in up-to-date technology that is both affordable and reliable. Regular maintenance and security checks should be done to ensure that everything is running smoothly and all customer data is protected. Additionally, being sure to listen to your employee’s needs and how a lack of tools or resources is leading to issues or failures can help you avoid unnecessary problems.
Financial risk refers to the risk that the company’s cash flow will not be sufficient to meet its financial obligations. This is easily the biggest concern for most business owners as cash flow defines the health and stability of your business.
This risk isn’t just limited to a lack of sales or higher operational costs, it also includes your funding sources. You’ll need to be careful when selecting investors and determine if the rate of return and stake in your business is reasonable for the amount of funding.
You’ll need to actively manage, adjust, and forecast your financial risk as this will be the most direct and consistent risk for your business.
How to better manage risk as an entrepreneur
Taking risks is closely linked with entrepreneurship. You may be leaving a steady-paying job, risking your reputation with new products, and adding financial risk with a loan or investment. On top of that, there are risks involved in hiring employees, marketing strategies, and even customer service.
Instead of being discouraged or aimlessly moving forward, you can instead work as a calculated risk-taker, who carefully takes steps toward your goals. Risk is inevitable, but by understanding that you can find ways to reduce unnecessary risk in your business and develop a risk management plan. This ongoing guide will differ for every business and is meant to be adjusted and improved over time.
Here are some potential steps to include to get you started on your own plan.
Proactively observe and weigh the potential risks that you don’t have control over.
Have 2-3 immediate actions you can take to mitigate different types of risks. If it’s something unexpected, such as a market crisis or equipment failure, this could potentially save your business time and money in the short term.
Give your employees an active role in identifying, managing, and mitigating risk. The more prepared they are the more likely your pre-defined actions will be executed successfully.
Document the risk
Keep written documentation for how to deal with different types of risk and how effective the plan was when those risks occurred.
Does risk-taking lead to success?
Taking risks can definitely lead to success— as long as you’re taking the right risks. For example, if you currently own a restaurant, COVID-19 most likely made it necessary to close your in-house dining. If you haven’t explored delivery or pick-up in the past, that may be a viable risk to take. Expanding to another location, on the other hand, maybe too much of a financial risk at this point in time, and would take further exploration and forecasting to see if it’s viable.
The truth is, we are faced with possible risks in and out of our careers all throughout our lives. Some are obvious wins, while others may take a fiscally responsible leap of faith. What’s important is looking at the pros and cons of the risk you’re considering and understanding if it will ultimately get you ahead.
If your competitors aren’t taking the same risks you intend to, then you’re already running the chance for greater success. However, there’s a difference between taking a risk when the odds are against you versus risking with better odds in your favor. Taking calculated risks that are well thought out and where the benefits outweigh the negatives are exactly the type of risks that will lead to your success.
Be aware of what could happen if your risks aren’t successful. Is the outcome still manageable? What would happen if you didn’t take the risk at all, and what could happen if you do? No matter the decision, think of your risks entrepreneurially.
What is ultimately going to get you further with the least bit of potential error along the way? Be inspired and excited to take risks while also keeping the health of your company at the forefront of your mind.
Establish your business risk tolerance
No matter the risks you’ll be taking, it is important that you assess your ability to tolerate them. No matter how prepared you are, you will run into challenges and it will be important that you’re prepared to handle them. Prepare your family, employees, partners, and investors for the difficulties that could come; having support and understanding from those around you will help make things easier for you both.
Finally, remember your dream and the reason you’ve decided to take such risks in the first place. Financial risk will likely be a large factor throughout your journey as an entrepreneur, but knowing why you went into business and that you’ve planned accordingly will get you to where you want to be.
Successful entrepreneurship takes not only ideas but courage. Understanding your market, your assets, and the ins and outs of your goal will help you make smart decisions when it comes to risk-taking.
If you’re looking for a better way to actively plan and assess your business risks, you may want to check out LivePlan. LivePlan helps you track and plan financials, try “what if” scenarios, pitch ideas, and more to help you be prepared for whatever risks might come your way.