FEBRUARY 18, 2015
You’re probably familiar with this story line. Entrepreneurs are the daredevils of the business world, always looking for another cliff in order to plot their next leap.
The problem with this narrative is that I don’t believe it is true. In my experience, one of the things that makes for a good entrepreneur is the ability to accurately understand and manage risk.
Most people do a really poor job of estimating risk in business. They often don’t consider the opportunity cost of staying put and not trying out new endeavors.
Here are five ways successful entrepreneurs approach risk:
1. Learning to accept and embrace the uncertainty.
Research shows that, contrary to popular belief, entrepreneurs are not inherently risk takers. A study published in June by the Halle Institute for Economic Research found that people about to start ventures are not more tolerant of risk than others. The research found that entrepreneurs do, however, become more comfortable with risk over time.
Indeed, many entrepreneurs know that risk is inherent in launching a new business. They also understand that without some risk there is no innovation, achievement and reward.
They don’t see risk as a problem but as an integral part of creating something of value.
2. Weighing the chances properly.
Successful entrepreneurs stick to the basic principles of risk management: They look for opportunities where if they fall short they lose only a certain value, but if they win they could stand to gain 10 times as much.
And the best entrepreneurs never bet more than they can afford to lose. They always consider Plan B (as well as Plan C, D and E) in case the current program doesn’t work out as expected.
Having these parameters enables them to build viable businesses.
3. Seeing and pursuing opportunities where others don’t.
While savvy entrepreneurs understand their limits, they don’t allow a lack of resources to limit their vision.
Howard Stevenson, a longtime professor at Harvard Business School, wrote that entrepreneurship is “the pursuit of opportunity beyond resources controlled.”
Entrepreneurs see a need in the market and do everything they can to make a business option come about even if they don’t have the resources on hand at that moment. To them, not pursuing a new opportunity is the risk.
4. Seeing more risk in working for others.
Working for a large company is no guarantee of job security. Many entrepreneurs understand what they are capable of and have the self-confidence to go it alone. They would rather be in charge of their own destiny, even if that means they might fail.
As an owner and CEO, I always knew when my company might fail and I would lose my job.
5. Seeing working for themselves as the best training ground.
The best jobs teach people skills that make them more valuable down the road.
Some large companies might pigeonhole a person as being suitable only for a job that limits his or her ability to learn and grow. Many entrepreneurs are willing to go out on their own to obtain the on-the-job training they might not get anywhere else.
In my case, I always wanted to be a CEO. I could have set out to learn this job by working at a big corporation but assuming a limited role there would have meant taking baby steps toward that goal.
Because no one in their right mind would give me a CEO job when I was in my 20s, I ventured out to learn the role myself by creating my own businesses. I learned far more and grew much faster than I would have otherwise.
What was the risk of not starting out on my own?