4 Ways Entrepreneurs Can Manage Risk
Entrepreneurship generally entails a certain degree of risk-taking. As such, entrepreneurs understand that they must be willing to take a risk in pursuit of potential profits.
Risk management is often thought of as the mitigation of uncertainty in the market, including aspects such as consumer behavior and the response of competitors. While entrepreneurs should clearly strive to prevent or avoid certain risks, they should also remember that some risk is inevitable, necessary, and—when well-managed—beneficial in the long run.
First-time startup leaders and more seasoned entrepreneurs must develop a mindset for risk management. Here are a few suggestions for approaching and reducing unpredictable variables in business.
1. Understand that risk is opportunity
From the earliest stages of a new business idea, risk and opportunity are inseparably linked. Entrepreneurs can make this connection when comparing their personal goals with possible entry points into the market. Preliminary research will almost always yield insight on both sides, which is why startup leaders need to understand their industry.
Along with identifying opportunities, doing your research can ultimately help mitigate and manage risk. The entrepreneur who closely observes consumer sentiment, for example, will have a better idea of how to steer clear of costly missteps. The same individual will also have a better frame of reference for what risks come with the territory.
Recognizing the many benefits that come from developing an understanding of the demands of the market can make a notable difference for new business owners. On the opposite end of the spectrum, trying to identify opportunities without risk can lead to less-than-desirable results. If you want to become a category-king, you must necessarily go where no one has gone before, as they say in Star Trek.
2. Trust the process
Not every visionary entrepreneur will have a grasp of risk management from the outset, and that’s fine. In fact, one Halle Institute for Economic Research study showed that most aspiring entrepreneurs consider themselves pretty conservative when it comes to taking risks. The paper also points out that entrepreneurs gain more tolerance for risk as they progress in their careers. Fortunately, each decision and change made by a business leader will bring some form of risk, which offers a valuable experience. One entrepreneur might launch his venture while employed elsewhere as a way to test the waters and slowly make the transition, while another might take a more direct approach. Either way, taking risks, which often means failure at some level, is generally worthwhile.
3. Turn risk on its head
Another way to conceptualize risk management is risk selection. Market research will help in determining where and how to incur risk for a business, but on a much more basic level. Entrepreneurs who decide to start their own companies face more risk than those who opt to stay in their current or most recent position. The question, then, comes down to what holds greater uncertainty: security in an established job, or potential success with a startup?
Either choice will have its own set of risks, but the one major difference lies in the ability of entrepreneurs to call the shots for their companies. However, entrepreneurs must also realize that starting their own companies entails the possibility of failure. Thus, entrepreneurs will have to weigh the risks as they brainstorm possible business models.
The risks associated with staying in one position or taking a new direction apply inside companies, as well, and perhaps more frequently so. Sometimes the only way to reach new heights is to make sacrifices, and this can be difficult to face, especially when a business has performed well. Going from a good situation to a better one will always involve risk, so business owners will have to ask themselves whether it’s worth it.
4. Avoid complacency
Just as one should generally avoid business opportunities that present themselves as risk-free, so too should one continue finding ways to stretch in a company even after achieving success. While this doesn’t mean taking on risk for the sake of it, it does mean finding a balance between organic growth and reckless expansion. The organic model may never propel a business forward, while the latter may mean that it does not survive at all.
Complacency can also come in the form of optimism. In other words, entrepreneurs often tend to have a positive outlook on their life and their business ventures in particular. Yet, one’s hope that a company is on its way toward sustainable growth and success will only move it so far. Once again, staying informed and conducting market research are crucial to managing and mitigating risk. In the end, startup leaders must strive to achieve their objectives in the face of uncertainty.