To a degree, every entrepreneur is a risk-taker. Starting your own business takes courage and conviction. But just how much courage is required depends on the individual and the business opportunity. Some entrepreneurs roll the dice and win. The majority make calculated wagers based on exhaustive risk/reward evaluations.
Depending on how likely things are to go as planned, what is at stake, and what you can afford to lose, a risky decision can easily slide into reckless territory. In addition to evaluating decisions on a case-by-case basis, entrepreneurs should take a moment to think about themselves and their overall comfort level with uncertainty. Consider these five areas:
1. Your finances.
Ted Bilich, founder and CEO of Risk Alternatives, says an entrepreneur's risk tolerance isn't just a function of his or her inherent preferences. You must consider your financials and whether you have a liquid nest egg to tap, should a decision go awry.
"No one is an island," says Bilich, a risk management and process improvement consultant. Think about your family, employees, and other stakeholders. In general, are you willing to take chances that might negatively impact their careers or incomes?
2. The amount of risk you face.
The first step in risk management is a risk inventory, cataloging where you currently face uncertainty and what dangers impending decisions hold. The audit may turn up patterns. For example, you may notice that you have a history of playing it safe, taking small calculated chances, or making bold calls.
"If you don't know what your current risks are, you don't have a meaningful basis for deciding your capacity for additional risk," Bilich says.
3. Good advice.
Bilich notes that "entrepreneurs need honest sounding boards." If you have a strong support network, it is easier to take risks because you can run them by your resources, confident they will give you a reality check, if needed.
Some people tend to be pessimistic with their predictions, while others are overly confident. Bilich says you should identify the lens through which you view the situation to get a sense of how you approach decisions.
For example, if you tend to be overly optimistic, realizing that trait can help you take a step back and reevaluate a potential business opportunity, or seek a second opinion. Conversely, a pessimistic viewpoint could cause you to perceive decisions as riskier than they actually are, causing you to miss opportunities.
5. The "sleep at night" factor.
Alexander Lowry, director of Gordon College's Master of Science in Financial Analysis program, calls this the "sleep at night factor." If something you are considering is going to disrupt your sleep, it may not be the best choice, he cautions. Think it through more carefully.
Contemplating these questions should help you understand your overall comfort with risk as well as patterns in your decision-making:
- What is the worst that could happen? Am I okay with this?
- What is the potential upside?
- What happens if I don't take this chance?
- What will I learn from this experience?
If upon evaluating the five areas above you determine you are not well-positioned to weather uncertainty, you may want to rethink how you approach decision-making. That doesn't mean you can't take chances and, of course, make mistakes. Just be sure you evaluate every decision on an individual basis. By analyzing your comfort with risk, you'll be better equipped to avoid making decisions that will negatively affect your business, your employees and loved ones, or your health.