In order to expand your business, you need to get comfortable with taking risks, but, taking risks isn’t about making ad hoc decisions, it’s about educating yourself, mitigating the downside, making a decision to proceed or not, and then, executing as flawlessly as possible.
Taking risks is at the heart of building a thriving business, and in creating wealth. These risks taken in business, not just in running your business, but, in your investments as well, will dictate how successful you ultimately become.
So how do you know when and how to take risk?
In this blog post, I review something I’ve called the Risk Compound Effect, and it goes like this:
- The better educated on a particular topic you become, the finer your decision-making instinct becomes. —–>
- The finer your decision-making instinct becomes, the higher the chance your bet will pay off. —–>
- The higher the chance your bet will pay off, the bigger the bet you can take, and —->
- The bigger the bet you can take, the more you compound your success. —–>
- The more you compound your success, the better equipped you become to handle risk
2 Key Entrepreneurial Risk-Taking Decisions
There are two pivotal decisions that I made over the last 30 years that changed the trajectory of my business.
The first decision was in 2003. My business was doing fairly well, with revenues approaching $2 million. One of our competitors approached me about buying his business, which was about half the size of my business.
The challenge was the acquisition was going to cost about 50% of my total available cash. (Considering my aversion to debt at the time, the only option for me was to pay with cash.)
The day after the acquisition closed, I had this nagging feeling that I had made a major mistake.
But after a number of months, things sorted themselves out, and I was able to cover the acquisition costs inside of the first year.
This acquisition propelled my business forward in a major way. We inherited some excellent talent, products, suppliers, and processes. Plus, it opened the doors for a second acquisition one year later.
The next major decision was the purchase of my first apartment building. The building was 21 units, which was fairly large considering I had never bought commercial real estate. More importantly, I closed on the property in November 2008 during the depths of the financial crisis.
The apartment building decision, fortunately, worked out. You can read about that in my book (which you can download for free) and multiple blog posts.
That first building began my foray into multi-unit residential real estate investing, and I continued to acquire buildings for the next few years.
The Risks Taken in Business
In both cases, I agonized over the decision, which forced me to be even more disciplined and prudent with my purchase analysis.
I went on to make many more key decisions over the years, but these two decisions and major entrepreneurial risks marked the beginning of my increased appetite for risk-taking. What I began to appreciate over the years is that success comes to those who take risks.
Not all of my major decisions worked out, of course.
I started a separate business unit in 1999 that failed. I lost over 50% of my cash inside two years, and I was forced to close the division down. You can read more about that here: 3 Top Reasons Why Startups Fail and How Not to Become a Victim
I can think of multiple decisions I made over the years that were critical. Some worked out, and some didn’t. Throughout my years of decision making, I decreased risk by:
- educating myself,
- mitigating the downside risk where possible,
- making decisions and being decisive
- pulling the trigger and actually moving ahead
Ultimately, I took risks.
I have spent a considerable amount of my time over the last 30 years researching opportunities.
These opportunities included real estate, business acquisitions, business expansion ideas, and even investments. Each and every time, I studied as much as I possibly could about the opportunity prior to making a decision to go forward or not.
So how do you, the budding entrepreneur, know when to take a risk? And then, what are the ways for an entrepreneur to decrease risk?
4 Critical Criteria for Risk-Taking You Must Understand in Entrepreneurship
1. Educate Yourself. Knowledge is Your Best Risk Defence
Most of the decisions I’ve made that didn’t work out were a result of me not being as knowledgeable as possible about the subject, opportunity, or acquisition.
In other words, I wasn’t prepared.
I find that I’m naturally curious about business, so that helps. Furthermore, I study every subject as much as I possibly can. I read books, listen to podcasts, attend seminars, read blogs, take courses, speak with other experts, and continue doing all of the above until I feel like I am armed with enough information to subjectively consider myself “educated” in that particular domain.
Once I feel educationally equipped, then—and only then—do I make a major decision.
There’s an expression I’m sure you’re aware of … KNOWLEDGE IS POWER.
I’m not talking about becoming an expert, but about becoming knowledgeable enough to have an intelligent conversation and understand the subtleties and nuances of the subject. When you become educated enough about a particular topic, it sharpens your decision-making skill and allows you to rely on your own instinct instead of the instinct of others, and this is what will allow you, the entrepreneur, to continue to expand your business, and beat your competitors.
The Risk Compound Effect:
- The better educated you become, the finer your decision-making instinct becomes.
- The finer your decision-making instinct becomes, the higher the chance your bet will pay off.
- The higher the chance your bet will pay off, the bigger the bet you can take.
- The bigger the bet you can take, the more you compound your success.
- The more you compound your success, the better equipped you become to handle risk.
2. Mitigate the Downside Risk
Now that you’re thoroughly educated, let’s focus on Step 1 above: The better educated you become, the finer your decision-making instinct becomes.
Sharpening your decision-making instinct is critical because it will help you decide whether you’re headed in the right direction. But more importantly, should you decide to move forward, your knowledge becomes your best defense
I’ve made many decisions over the years that didn’t work out, but at least I made many decisions.
What do I mean by that?
I know many business owners who fear to make a mistake. As a result, they just don’t make decisions. They stick with the status quo, figuring the status quo is less risky than the decision. In some cases, they are probably right, but if you find that you’re consistently too afraid to make a decision, then none of your decisions will ever work out!
There’s a popular Wayne Gretzky expression: “You miss 100% of the shots you don’t take.”
If you’ve done your research, then your chances of success are higher. And if you can shoot 60, 70, or even 80% with your decision-making (i.e., 80% of your decisions work out), then it clearly makes sense to keep taking the shots.
If you’re only shooting 30, 40, or even 50%, then don’t take the shot.
So mitigating your risk stems from being fully educated on the subject and doing your research prior to moving forward, but also you ideally want to throw as few dollars into the decision as possible prior to moving forward. Transfer some of the risks to another party where possible.
Let me explain.
There’s a term in risk mitigation called risk transference.
Risk transference means you’ve transferred some or much of the risk to another party.
Insurance is an example of risk transference.
What does risk transference look like from a small business perspective?
- It’s possible that you do a sample test, put as few dollars into the project as possible to test the market, and if the test works out, then move forward.
- Or you can partner with another individual, person, company, or supplier on a project.
- If acquiring technology hardware (for example) is part of the risk, then you can negotiate a better return policy with the supplier, provided you return the hardware in a defined period of time.
The idea is, if your decision doesn’t work out, you want to make sure that you suffer as little financial loss as possible.
3. Make a Decision. Careful Planning Leads to Success.
This step seems quite intuitive. Once you’ve reached the stage where you’ve educated yourself and mitigated as much of the risk as possible, then you need to do two things:
- Make a decision: yes go forward, or no maintain the status quo.
- Pull the trigger.
Making a decision and pulling the trigger are two different things.
I’ve seen many people make a decision to move forward on a project, but things get in the way, and they never end up moving forward.
I was in this situation a couple of years ago.
After I sold my business, I decided I was going to get into the property management business. I figured I would be my first client. I researched the market, listened to dozens of podcasts, read multiple books, spoke with a number of people about property management, and in the end, decided I was going to move forward.
EXCEPT, I never pulled the trigger.
4. Execute. Move Forward With the Risk (Decision)
You need to put the team together, gather your resources and dollars, and go forward.
Yes, decisions and risks will fail, but failure isn’t the opposite of success. It’s a stepping-stone to success.
Fear of failure shouldn’t be the reason you don’t move forward. The reason to not move forward is that you, your team, or your company just isn’t ready.
Deciding not to move forward after you’ve done your research is also a successful outcome.
Too many people and companies don’t succeed or grow beyond their current state because the individual(s) aren’t comfortable taking risks.
Risk-taking is part of the entrepreneurial journey, and of course, entrepreneurs are extreme risk-takers. First, you need to understand how human weaknesses complicate decision-making, calculating risk-taking as an entrepreneur, and how to take risks in business.
You must get comfortable with being uncomfortable. You need to get comfortable with taking a risk because, many times, not taking a risk is the biggest risk of all
If you enjoyed this article, you might also enjoy this one: My Journey Post Business Sale as I Sail Into a New Harbor. The Next Stage, Entrepreneur Semi-Retirement, and Life Post Business Sale