Do entrepreneurs need to take risks to succeed for their startups?
If you’re thinking about starting your own business, you’ve probably come across this theory before. Usually while learning about the rags-to-riches backstory of your favourite entrepreneur, who, at some point, took a lot of risks which paid off.
And there are plenty who would back it up. According to Gallup CEO Jim Clifton in Entrepreneurial Strengths Finder, only about five in every thousand people have an aptitude for starting and growing a business. Risk-taking was seen as a key trait supporting success in this arena.
But entrepreneurial risk-taking is certainly not without its problems. According to a Harvard Business School study, up to 75% of all venture-backed startups fail, so launching your own business means the odds are already stacked against you.
So is it just a case of daring to do it, or is it more complicated than that? Here are some tell-tale signs of risk-takers.
1. You are more inclined to jump into new ventures:The more risks you take, the less fear you’ll feel when confronted with them. This will help you take those leaps into new ventures. But remember, it is not always the case that successful entrepreneurs were born risk-takers. According to a study on entrepreneurship by the Halle Institute for Economic Research, people who start a business are no more risk-tolerant than others, but they can become more comfortable with risk over time.
The more risks you take, the less fear you’ll feel when confronted with them. This will help you take those leaps into new ventures.
Tip: Letting go of fear can help boost confidence when making business decisions. If you don’t possess it already, don’t worry – this lack of fear is something you can develop.
2. But you may ignore the different types of risk (and consequences): As we shall see later, it’s worth bearing in mind that there are different types of risk with varying potential for damage. Some risks might offer enough historical data to be calculable, giving you a fighting chance of predicting how they might turn out, while others might be completely unforeseen. Ignoring these types and treating all risks as equal means you’re more likely to get burned along the way.
Tip: Understanding the difference between the types of risk (and their consequences) can help you determine how risky a particular decision might be and help avoid any unnecessary pitfalls. As risk management expert Daniel Wagner wrote in Global Risk Agility and Decision Making, ‘…with some foresight and critical thought, some risks that at first glance may seem unforeseen, can in fact be foreseen… [and] with the right set of tools, procedures, knowledge and insight, light can be shed on variables that lead to risk, allowing us to manage them’.
3. You may seize opportunities quickly, rather than hesitate: A large part of being a successful entrepreneur is putting yourself in the right place at the right time, but as that ‘right time’ is often a fleeting moment it means only those fearless enough to act will prevail.
This is not to say you have to be reckless. According to The Entrepreneurial Personality: A Social Construction, it’s a little simplistic to say that successful entrepreneurs are those who are happy to take risks that throw all caution to the wind. Rather, ‘it has been argued that, given that some risk of failure must be attached to any business undertaking, the successful entrepreneur is the one who takes calculated risks (my emphasis)’. Successful entrepreneurs are ‘medium risk-takers’ – they go for the ‘achievable challenges’.
Tip: Doing your research ahead of time can help even the most cautious people seize opportunities when they appear, because it offers more of a calculated risk where the rewards or consequences can be better predicted. But you can still keep a level head. Take a risk on something you know to be achievable.
4. But you may think less and act more: An ability to act on exciting new opportunities can be a good thing, but some decisions require more careful thought in order to get the best for your business. The way you approach some risks can make a big difference to their success or failure, so it’s worth allowing for more thinking time. According to a report by CB Insights on why startups fail, 42% of this was down to there being no market need for a product, and 17% because there was no business model.
Tip: The lesson to take away from this? Do your market research to make sure your plan is viable before you act, and get a proper business plan in place. It’s great having the confidence to take a measured risk, but this needs to be backed up by solid groundwork if you want to give yourself a fighting chance.
5. You can blaze a new trail: Being a risk-taker means you’ll be doing things your way. You’re less likely to worry about consequences than other people, which opens up far more opportunities. A 2017 study by CPP Inc found that one of the traits entrepreneurs scored highest in was intuition – more commonly known as ‘gut instinct;. And it makes perfect sense that if you possess this trait, it can enable you to blaze a new trail in the industry rather than following others through tried and tested routes.
Tip: Opening yourself up to more opportunities and trusting your gut instinct will increase your chances of finding a rich seam in your sector that you are free to mine unhindered by competitors. You’re also more likely to differentiate yourself from the crowd.
6. There’s greater potential to lose everything: Real risk-takers will often be playing with their own money, livelihood and career. This can sometimes mean they have far more to gain if things go right. However, such personal stakes also offer the potential for losing far more than those who are more cautious.
Tip: Only risking what you can afford to lose is a cliche, but a useful one to bear in mind. Setting aside a financial foundation to fall back on should be considered an essential part of your business strategy. According to serial entrepreneur Steve Blank, having Plans B through to Z and being able to pivot into each plan when things go wrong is a hallmark of great entrepreneurs.
7. You’ll be able to take a hit and get back up: Not all risks pay off. You’ve probably already tasted failure more than once, and the fact that you’re here now, reading this, means that you’ve learned how to get back up again and dust yourself off for another go. This is an invaluable lesson for any entrepreneur who wants to be successful, because business achievements often come simply from not giving up. In fact, in Trailblazing in Entrepreneurship: Creating New Paths for Understanding the Field, the authors found that failure can help you develop valuable coping skills, which ‘are likely to impact on subsequent entrepreneurial thinking’.
Tip: Failure is a great teacher. Embrace the fact that not every risk you take will pay off, learn from your mistakes, and make sure you don’t give up. If you do that, success becomes a matter of ‘when’ not ‘if’.
8. But don’t confuse confidence with cockiness: There’s a fine line between optimism after a setback and becoming a little too cocky for your own good – even when the signs suggest you need to modify your approach if you want to succeed next time. There have been many studies over the years that suggest over-confidence can lead to business failure. Just one example: back in 2008 the results of a study published in the journal Experimental Psychology found that over-confident business people are more likely to leap into new ventures with little regard for competition or market size. A result of this, according to lead researcher Briony Pulford, is that ‘new business startups tend to exceed capacity, and many new businesses fail within a few years’.
There’s a fine line between optimism after a setback and becoming a little too cocky for your own good – even when the signs suggest you need to modify your approach if you want to succeed next time.
Tip: If you think this sounds like you, try to practise a little self-awareness. Infusing your approach to business with a little humility never hurt anyone. If you try to avoid appearing cocky or arrogant, it will also help you forge those strong relationships so important to a startup.
Striking a balance is the best path to success
So, yes, starting your own business means you will need to take risks. But the good news for those who think they are risk averse is that you’re already a risk-taker.
Every time you step out of your house or apartment you’re taking a risk, with traffic, foods you eat, people you meet… every decision you make in life comes with a risk of reward or something going wrong. It’s just that these risks have long been weighed as worth taking in order to live our lives, so now we don’t even consider them as such.
All you need to do now is apply that same thinking to becoming an entrepreneur.