Risk. The very word conjures up in my mind a highly dangerous and unsafe scenario. I stop for a second and imagine the scariest scenario that I can think of. I close my eyes and visualise myself falling off a tall building with no parachute. Yes, I’m afraid of heights. We’ve all got our fears and phobias.
The likelihood of me actually having to jump off a tall building is quite small. But in the event that I have to, I’d ideally like a parachute, a partner-in-crime and one of those giant inflatable beds on ground level; as well as any necessary medication on standby should the incident actually materialise.
That–in a nutshell–is risk management.
Now let’s turn our attention to the risks facing a startup. Whilst my example is extreme and probably not applicable to the day-to-day operations of running a business–the crux of the analogy remains. How do we best cushion ourselves against the undesirable? What measures and safeguards can we put in place in the event that things go completely south? And lastly, what risks should we even be taking?
The Startup Life
Starting a business from scratch is the probably the riskiest undertaking I’ve ever attempted. In a world where a fixed-income complete with generous benefits is considered by many as the creme-de-la-creme of all employment opportunities; I seem to have ideas that deviate greatly from the norm.
I want to jump off that building. I want to overcome that fear and see what I’m made of. I want to start a business from scratch and build it brick-by-brick from the ground up. What propels an entrepreneur forward is the potential upside; not the numerous downsides. What propelled me forward was faith–faith that I could do it.
If you spend too much time, energy and effort thinking of the potential downside; you won’t ever get started. Your mind will resemble an indecisive yoyo. Nevertheless, faith alone is not enough. Neither is a solid business strategy and plan. And neither are your day-to-day operations. What keeps a business afloat is risk management.
While the formulas and forecasts are complicated, risk management as a business discipline attempts to answer a very simple question. How can we reduce or eliminate the downside while still hanging on to the potential upside? Calculating risk involves setting a clear goal and planning for all the potential outcomes that we can foresee happening.
The first thing you need to determine is: what’s the goal? No one can determine whether a risk is worth taking without a clear goal in mind. The goal needs to be specific and measurable. A business, as its own legal entity, has goals that are independent to the people who run it and work in it. So what are the goals of the business? If you don’t have the answer to this quite yet, it’s time to start prototyping and testing to figure out what they actually are.
Even if you do have a solid business plan on paper, the goals and trajectory of the business could change significantly either during the prototyping phase; or through changes in market and consumer trends. Once you have a solid idea of the goals of the business, it is time to cast the net wide and see what returns.
Nothing Ventured, Nothing Gained
Whenever I read books or articles on the risks of starting a business, the content typically focuses on all the risks that startups should eliminate or mitigate–not the risks that a startup should take. No startup can ever grow in an environment where the soil is a fertile breeding ground for fear and caution. That’s part of the reason why so many startups are filled with unambitious and downright boring ideas. If you’ve spent years working in established businesses, you’ll need to unlearn a considerable portion of what you’ve been taught.
A startup is simply not an established business; which is why it never fails to baffle me when people compare the operations of a startup to a fully-functioning business. It is analogous to comparing a baby with an adult. The foundation stone of every startup is a risk-laden idea. To build a company, founders must take more risks, not less.
Every risk management textbook I’ve read has repeatedly said that past results are a poor way of calculating future risks. Just because something has worked well in the past doesn’t mean that it will continue to work well in the future. Our experiences with the Coronavirus lockdown are a case in point. We were accustomed to going to our place of work day-in and day-out and couldn’t imagine a world where that wasn’t the case.
Yet, here we are. So why do we – as humans – think that doing the same thing over and over again eliminates risk? When traditional businesses stop taking risks, they stagnate. Therefore, the thought of a startup as a risk-adverse entity is entirely unthinkable. The real question is: what are the risks that are actually worth taking?
Firstly, startup founders–particularly first time entrepreneurs–should take more market risks. Market risk is the risk that people may not want what you’re building. Founders often decide to start businesses to solve a problem that they themselves had. The key here is: what problem are you solving? How big of a problem is it? And lastly, will this solution be able to generate a profit?
Even in this age of the internet, it never fails to amaze me how often I meet startup founders who think local, not global. If your idea has not taken off in a particular market with a particular demographic, you can always retarget. If you’re talking to and approaching the wrong people, your idea will never take off–no matter how brilliant it is. Target and retarget till you find the right crowd. If you truly believe in your idea and vision, it is only a matter of time till the persistent pays off.
Which brings me to my next point…
Not everything is in a startup founder’s control. Who knows when what will take off and when?
In Why Startup Timing is Everything, Pete Flint discusses the Critical Mass Theory of Startups, “It’s the tipping point for when a product or market goes under rapid transformation, seemingly overnight. A critical mass point for a startup opportunity arrives when there’s a minimum threshold of three preconditions: economic impetus, enabling technology and cultural acceptance.”
These are all external factors that are not in the startup’s control. Arriving at the party too late or too early is never a good thing; not in life and not in business. For the idea to truly take off, you have to be the right person at the right place at the right time.
I’ve always believed that all we have to do is prepare ourselves till the right opportunity presents itself. When the opportunity finally arrives, it is time to seize it with both hands. Till then, it is diversification to the rescue.
Allison Schrager, the author of An Economist Walks into a Brothel, uses the movie business to illustrate this point. Movies are inherently risky–with millions of dollars invested in making one. A handful of movies cash in at the box office–but most don’t earn nearly as much and some even lose money. If past results were an accurate way of predicting the future – we could just release the same movie over and over again and expect the same results.
But as we all know – that’s not how it all works. The creative industries, in particular, don’t function like brick-and-mortar franchises where one can simply duplicate and replicate the same idea and system on a global scale.
Hollywood Studios diversify by developing an entire slate of movies rather than just one or two at a time. That way the movies that become big hits help pay for the movies that end up losing money. They also diversify the means of distribution – from the theatrical release to home video formats to licensing streaming services.
Why you should still jump
Risk management is not an exact science. Life is unpredictable and there’s just no way you can plan for every possible scenario, no matter how hard you try.
I say jump off that building. Just remember to grab that parachute, invite a partner-in-crime… and enjoy the ride. If nothing else, you would have overcome your biggest fear–and that would be a victory in itself.
About the Author
Dipa Sanatani is the Publisher at Mith Books and the author of The Little Light and The Merchant of Stories. In The Merchant of Stories, Dipa takes the reader on a personal journey–narrated through a series of candid journal entries–on what it takes for entrepreneurs and creatives to start their very first venture.
14 thoughts on “Why Startup Founders Should Embrace Risk”
High risk = high return.
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