"Learn to take risks." "Fail early, and often." "If you don't risk big, you can't win big."
You've heard all these bits of business advice, and many more like them, probably more times than you can count. Taking risks, and being willing to fail, are considered so important these days that leaders at even large companies puzzle over how to make their employees into bigger risk-takers, and having started a business that went under is considered a badge of honor.
Missing from all this hoopla about the glories of risk-taking is a clear-eyed calculation of what it actually means for your business. Just ask Don Kurz, CEO of ad agency Omelet. His company is so risk-friendly that its very name expresses a willingness to break a few eggs on the way to reaching its goals. While risk-taking has worked out well for Omelet, it isn't for everyone, he says.
Instead, he advises, when pondering a risky move, consider the following before you decide:
1. Any risk should serve your company's mission.
Risk-taking shouldn't be reckless, it should be highly strategic, Kurz says. For example, the company co-owns Betsy's Best, a line of nut butters, and recently produced a feature-length documentary about ex-gang leaders now rebuilding their communities. While these endeavors may sound way off base for an advertising agency, they fit with Omelet's long-term strategy, Kurz explains.
"We're not trying to be a traditional agency," he says. "Any potential endeavor has to fit with that mission, which implies being disruptive to the status quo." Beyond that, he says, any new project has to take full advantage of Omelet's core competencies of crafting strategic insights and creative story telling, something both these projects did.
"Perhaps most importantly, anything we evaluate, we assess through the lens of 'Will it enhance the Omelet brand and ultimately the value of the company?'" Kurz says. Daring or not, a new project has to meet all these criteria before Omelet will take it on.
2. You really have to be OK with failure and losses.
"If you want to take these kinds of risks, you must commit your entire business strategy to that," Kurz says. "Everything has to be consistently aligned and you have to be prepared for short-term profitability hits."
That can be a big challenge for a young company working on a thin margin, he concedes. But if you can manage it, it may be worth it. "The goal is that the company's worth is higher in the long term because you're creating a pipeline of innovation along with new sources of revenue." (Here are 8 things you can do to foster innovation in your company.)
3. It's perfectly fine not to take risks.
As Kurz notes, risk-taking, and the failure that goes with it, are very fashionable notions these days. But don't make the mistake of basing your business strategy on what's fashionable.
"There's nothing wrong with being risk-averse," he says. "You can organize your systems correctly, hire employees who are also risk-averse, and still be a fine company. It's when companies put out mixed messages that they run into problems."
4. Risk-taking comes at a cost.
"Any untested initiative will inevitably strain cash flow," Kurz notes. And that means some tradeoffs. "It could impede everything from reinvesting in the core business, to employee raises and bonuses, to the company's ability to make new hires, and more."
So if you're going to take risks, he says, you must budget carefully for those risks, have a clear idea of how much you're willing to spend (i.e. lose) and have the discipline to stick to that number. "You also must be realistic about when these investments will generate a return, if ever."
5. It can take a very long time for risky endeavors to pay off.
"It will always take a lot longer to generate a return than you think and that's why you must also assess 'soft benefits' such as enhancing the brand value and the ability to attract the best employees due to the excitement of taking some risks," Kurz says. "Sometimes you shouldn't necessarily expect a cash return, but should instead expect other benefits that are tougher to measure." The gang documentary fits in this category for Omelet, he adds.
Making substantial investments in projects with delayed returns--or none at all--will reduce the profitability of a small business, at least for a while. "Any investment that won't pay off in the short term must be factored into your working capital projections," Kurz says. "So planning these investments is critical."