What is risk?
Most would define it as the probability that anything other than the desired outcome would occur. Risk revolves around 2 factors; probability and severity.
It is commonly accepted that the greater the reward, the greater the risks. It is important to note that the inverse is not always true. You can take great risks, and still be likely to end up with nothing. Do that a couple of times and it is likely you will find yourself in some sort of negligence lawsuit.
Acceptable risks vs mindless risks
In a startup, the focus should never be about the risks to take. It should be about trying to achieve a particular goal and mitigating the risks that come along the way.
Take jaywalking for instance. The goal is saving time. The risk is the increased probability of not being able to cross safely and hence the inability to achieve the goal, time savings. To mitigate this risks, you choose to jaywalk at a spot you deem to be safe, or cross 5 meters behind another jaywalker, so that he or she then acts as a barrier. The desired outcome is crossing the road safely with the higher goal of saving time. The focus was on risk mitigation when achieving your goal.
On the flip side, just because you saw someone jaywalking, you make a spontaneous decision to take the risk of jaywalking too. Failing to consider that it was a mindless risk for you to take as perhaps you were not in a hurry anyway or that you would have passed a signalized crossing anyway.
Jaywalking, properly executed, would have been a low probability, variable severity risk. But if there was no reason for taking that risk, then it was an unnecessary addition to your risk profile. Unchecked, risks add up quickly and you’ll wake up to dooms day sooner than you think.
Who made risk taking glamorous?
So why do some people still take huge risks without giving much thought the risks? I would put it down to how the world and the media have been providing coverage on successful entrepreneurs. Nobody likes to talk about failure. Success stories sell better.
I’m not going to tell you about the time I lost $200,000 to poor investment choices, but I will tell you about the money I made from a lucky punt on some stocks, in a bar; half drunk; offering to buy everyone drinks.
To the naive, this gives off the impression that most succeeded by taking risks; huge risks, and made it on their first try. Hence there is no need to mitigate risks to give yourself a second chance, because you are going to succeed anyway. All in as they say at the poker table. The bigger the risk you take, the greater your success story is going to be.
Many do not realize that it is precisely because of risk mitigation that afforded these entrepreneurs multiple attempts, until they succeeded on their nth try. Do these sound familiar to you?
- XYZ took a huge risks and expanded to new markets in Asia, we should do that too
- ABC spent 5 buck on a SuperBowl advert, we should do something similar
- My friend made more than double from the stock market, all by daring to take the risk
Understanding the differences
Risk taking and risk mitigating are the opposite of each other. If you’re thinking of risk taking, you are not likely to be thinking about risk mitigation. Startups should not be easily distracted or attracted to fairy tale like success stories. Every risk taken should be a byproduct of trying to achieve something bigger. Not a result of being a copycat, not because the founder was some hot blooded 18 year old looking for an adrenaline rush. Only then can you focus on risk mitigation.
I’m not saying that risk can be eliminated, and I acknowledge that risks are inherent in every startups. But focusing on a goal, and then mitigating the associated risks instead of risk taking will set you in the right frame of mind and will get you a lot further.
Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.