You know the conventional wisdom about entrepreneurs: They bet everything on one roll of the dice. They are audacious mavericks like Richard Branson who defy the odds and risk everything on one big idea, product, or service.
It's a vivid image, one that is evocative, inspiring, heroic...and wrong.
Entrepreneurs are some of the most risk-averse people around. "When it comes to gambling, entrepreneurs will play only if they use their own marked deck," is the way a psychologist friend of mine who has studied them puts it.
There's a reason that seasoned entrepreneurs don't think of themselves as risk takers, even though everyone else does. They have developed terrific ways to limit potential losses as they start a venture.
They accept it as part of the game and then work extremely hard to reduce it to a minimum.
People who have created two or more successful ventures will tell you: You need to know how much you are willing to lose before you even start thinking about starting something new. And you need to do everything possible to make sure you don't exceed that figure.
Successful serial entrepreneurs adhere to the basic principles of risk management: If you're going to play in a game with uncertain outcomes:
1. Don't pay/bet more than what you can expect as a return, and
2. Don't pay/bet more than you can afford to lose.
Both of those ideas can be summed up with the phrase "acceptable loss," a concept where you consider the potential downside of whatever risk you are about to take--such as starting a new company or some other venture that is going to consume a lot of your time, capital, or other assets--and put on the line no more than you find it acceptable to lose should it not turn out the way you want.
How could this concept work for the rest of us? As you prepare to take action, you need to ask two questions to make sure you stay within the bounds of your acceptable loss.
- What can I afford to pay to take the next step, and
- What am I willing to pay to take the next step?
Now the costs we are talking about go beyond the financial. In fact, there are at least seven classes of assets at your disposal and at risk
- Money (of course).
- Professional reputation.
- Personal reputation. No one wants to be branded a loser.
- Opportunity cost. If you are spending time on X, you cannot be working on Y at exactly the same moment, and Y, potentially, could be a far better idea.
- Relationships. Starting anything new is stressful--emotionally and financially. And it is easy for that stress to spill over into your relationships with your spouse and kids.
- Your health and sanity. I wish I were being hyperbolic, but I am not. If you are not careful, the stress of starting a new business can jeopardize both.
And entrepreneurs work extremely hard to limit all seven.
Acceptable loss does not depend on the venture but the individual. It varies from person to person and across the course of someone's lifetime. (For example, you may be willing to risk more when you are young, knowing you will have decades to recover should things go wrong; less when your kids are approaching college age and you need to save every dollar you can for those upcoming tuition bills; and then more later on once those bills are behind you.)
But at all times, you want to keep your potential risk to a minium for two reasons.
First, not every new venture works out. If yours doesn't, it hasn't cost you much, and you have the resources to try again.
Second, if it does work out, you have the resources to grow your idea quickly.
All this explains why entrepreneurs hate risk.