Is it Worth it? Weighing Risk vs. Opportunity
In my daily life, I often work through decision-making processes with clients. One of the common issues is uncertainty about making potentially risky decisions, especially in business.
One thing we usually discuss is that there is really no such thing as business opportunity without risk. Have you ever heard an enthusiastic startup claim they have a huge opportunity with hardly any risk or competition? In my experience, this isn’t usually accurate.
The general rule with any business is that either you have a strong market for an idea, therefore you probably do have competition, or you’re headed into murky waters without a clearly defined market. Either way presents a risk. Essentially, risk and opportunity are two sides of the same coin.
So how do you decide which opportunities are worthwhile?
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The Psychology of Risk
The nature of entrepreneurship is that you often enter into situations that represent a significant risk. A review of studies on the subject shows this doesn’t mean all entrepreneurs are more “risk tolerant” than the general population. But the research does show that we are, on average, more likely to value autonomy and “identity fulfillment.”
This means that entrepreneurs tend to be motivated to pursue work that is a big part of their personal identity. It's your vision for creating something amazing. And you want the autonomy that comes with being your own boss - it forms a core part of your identity.
The psychology of risk is a very complex topic which, like many areas of psychological research, involves different theories from many researchers, distilled and refined over decades. Yet there is one thing that all tend to agree on. Humans are hardwired to identify and avoid risk, especially where it might threaten livelihood or life.
What helps entrepreneurs overcome that innate risk aversion? A different mindset.
The most successful tend to have gone in with an expectation of risk, paired with a reasonable calculation that the risk could pay off. It’s a “winning” sort of mindset, as opposed to a “gambling” one. It's about stacking the odds in your favor with repeated, manageable risks instead of simply hoping an idea will pay off.
Successful entrepreneurs manage risk and opportunity as two sides of the same coin.
Change is never easy for anyone - we are all impacted by innate biases that cause us to prefer to maintain the status quo. But here's something that sets successful business owners apart from the pack...
They have learned not to confuse gut instinct with fear.
They step out of their comfort zone to assess risk as realistically as possible. Each new step becomes a calculated risk with more upside potential than threat of harm.
It’s worth remembering that our own bias toward avoiding loss causes us to overestimate risk. Business owners have to continuously fight against the resulting instinct to play small.
Key Areas to Consider
The hallmark of a well-thought-out venture is that you have balanced out logic and emotion. Risk isn’t determined by how fearful you are, it is calculated as closely as possible by examining the facts.
You won’t go into a new opportunity risk-free, but you can go into it armed with the right knowledge.
Here are some key areas when evaluating opportunity vs. risk:
- Financial - The big, obvious one most people focus on. In a startup venture, you will examine factors such as the risks of investor funding, debt, or self-funding. You look at revenue versus expenses, burn rates, marketing, and staffing.
- Strategy - What strategic new opportunities exist? What's the risk of choosing this direction (in the form of lost opportunity cost)?
- Competition - Are you serving a sub-niche of a proven market even more efficiently than the established competitors? The flip-side is to look at how easily your ideas may be copied.
- Operational - This is all about your systems, processes, and business practices. Operational risk largely stems from how well you have created best-practice processes and contingency plans for when things go wrong (like general liability coverage to cover unintentional copyright violations or a data breach).
- Reputation - What might the risks or opportunities be for your reputation? For example, in a new potential business partnership, look at how the ethics and branding of the new partner fits with your own.
- Growth - How you scale and grow represents a large part of risk vs. opportunity. For example, some businesses find themselves unprepared for the cash-flow crunch of a sudden spike in growth. This might lead to issues with quality in their product or service. On the other hand, if you deliberately have slow growth, you may find yourself overtaken by competitors who are willing to take on more risk by leveraging more borrowed capital.
Managing Risk
One of the first steps is to embrace the fact that there is risk, and with that risk comes the potential for failure. Is failure the end of the world? No. It's feedback. It's a part of your journey toward accomplishing anything meaningful.
Startups have the advantage of being able to “fail fast” and pivot on strategy, often much faster than their larger counterparts. Failure can provide invaluable learning opportunities, a fact that is not lost on seasoned investors when they look at who is behind the company for a potential deal.
Of course, risk comes on many different scales. My personal philosophy is to go for the kinds of risks that allow you to fail repeatedly without destroying your life.
For example, you might invest a lot of time, energy, and money into writing a novel only to have it fail. This will be very disappointing but it’s unlikely to deeply impact your family's way of life. On the other hand, deciding to leverage real estate using your own house as collateral represents a significant risk to your way of life.
At another level, you might ask whether now is the time to start your own company. Do you face more risk in doing that than in staying in a job at someone else’s company? Often the answer is yes, but not always.
Sometimes there are significant risks to staying in the “comfortable job” - perhaps the industry is shifting and you risk losing your job anyway. Perhaps the risk is to your personal well-being and identity. Staying in a job might not feel right to you - it may even impact your mental health. It may mean you never fulfill a dream.
There’s a common saying: “In the end, we regret 100% of the chances we didn’t take.” You could say that regret itself is a risk, so perhaps that comes into your personal equation too.
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Final Thoughts
Weighing risk vs. opportunity is a part of your job as a business owner. Investing time and attention into a good decision-making process is guaranteed to have a high ROI over the course of many years.
Most opportunities that are worth taking have a real element of risk, and an entrepreneur’s advantage lies in being able to take a measured approach.
Look deeper into the future as you consider the risk you are accepting. Learn as much as you can and distinguish between fear and real risk.
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