4 Smart Risk-Taking Principles Every Entrepreneur Should Know
Business is about taking risks, but not every risk is smart.
This expert opinion by Peter Economy, The Leadership Guy, was originally published on Inc.com.
Business is about taking risks, but not every risk is smart. The difference between calculated gambles that make you successful and foolish bets that destroy your business is all about sticking to certain principles. Throughout the years, I have seen many entrepreneurs win or lose because of how they approach risk. If you want to change the way you look at and take risks in your own business, here are four tenets to live by inspired by my colleague, Karen Firestone, co-founder and Chair Emerita of Aureus Asset Management.
1. Correctly Size Up Your Risks.
When a new opportunity comes up, you need to ask yourself: Is this risk right-sized for my current situation? Right sizing means calibrating the potential downside of your risk relative to how much you can afford to lose. In other words, a startup should never have all its eggs in one product launch, just like a portfolio manager should not allocate 50 percent of a fund to their “best idea ever.”
Perhaps you’re an entrepreneur in real estate looking to buy your first office space for your growing company. You’ve been saving and planning for this moment for years, and the space you fell in love with initially was out of budget. However, now that your company has grown, that place is finally “the right size.” Ignore the warning signs and invest in that property, and you could end up paying too much in lease payments to be sustainable. You made the risk larger than your company could handle.
Right sizing risk applies to hiring decisions, marketing budgets, investment in infrastructure, product launches, and more. You want to bet enough to make progress but not so much that one move could be a knockout punch to your business.
2. Master Your Timing.
Timing is everything. I don’t care how good an idea is, if the timing is off, you will fail. Opening a beach resort in hurricane season is a terrible decision. Launching a luxury product or service during an economic downturn is another example. Successful entrepreneurs know how to time their decisions by paying close attention to market cycles, seasonal fluctuations in demand, and competitive activity. That doesn’t mean you should wait around until everything lines up perfectly because it never will. Instead, it means knowing when you have momentum or a tailwind behind you and when you don’t.
Perfect timing is rare, but good timing is out there all the time. Learning to spot it is one of the most important risk-taking skills you can develop. Sometimes, the right move is simply to make a decision faster than others.
3. Leverage Knowledge And Experience.
Don’t take risks in areas where you don’t have fundamental expertise. It sounds simple but believe me that entrepreneurs make this mistake repeatedly. Tempting opportunities come in all shapes and sizes in all different areas, and it’s easy for you to get seduced by the potential.
Say you are a small software company looking to expand into hardware. You should absolutely leverage experts and hire smart people who know what they are doing. Go to the established players in hardware and partner with them. Your doctor does not look up surgical procedures during an operation because she has read about it before. Instead, she knows what she is doing because she has done it many times before. Set that bar for yourself.
4. Stay Skeptical Of Guarantees.
Mistakes that come with taking risks are easy to make when you let go of healthy skepticism. If someone promises you a sure thing, guaranteed returns, or a “can’t-miss” opportunity, be on the alert for a scam. Spreadsheets are a wonderful thing, but in reality, spreadsheets are just highly educated guesses and throughout time, they never turn out perfectly.
If someone is selling you a “sure thing” or a “best idea I ever heard,” then do yourself a favor and walk away until you have sufficient time to do your due diligence. No opportunity is guaranteed. Successful entrepreneurs always question assumptions, stress-test projections, and plan for the worst.
