All entrepreneurs are risk-takers. If you are uncomfortable with taking risks, entrepreneurship is most definitely not for you. But does that mean you should take every risk you can?
In this article and corresponding video, we discuss how to evaluate which risks are worth taking.
The impact of a safety cushion on risk-taking
It is obvious that when you have a financial safety cushion, you are more likely to take risks. However, I would argue that this leads to more reckless decision-making. In my opinion, it is much better to operate as if you have limited financial resources under all circumstances, because it forces you to be disciplined and to really evaluate if a given risk is worth-taking from all perspectives.
The impact of incomplete information and uncertainty on risk-taking
As an entrepreneur, you must operate on incomplete information and also deal with a certain degree of uncertainty. Therefore in order to reach a conclusion, you are often forced to make assumptions and supplement the information gaps with your best guess. Furthermore, you never know in advance which assumptions will turn out to be correct.
The art of properly formulating those assumptions and objectively assessing if you should pursue a certain plan of action lies at the core of responsible risk-taking.
That is why it’s even more important to create a robust process that will allow to evaluate all available data and to set up a feedback mechanism to act in a timely manner on new information as it becomes available. A financial model serves exactly that purpose.
The golden middle
The best approach is to strike a balance between being unafraid to explore the unknown and being able to reduce that unknown to a number of variables you can measure and act upon. This would allow you to take calculated risks and achieve optimal outcomes.
How do you learn how to do that?
The Startup Station’s curriculum specifically focuses on how to deal with uncertainty and how to translate your vision into a financial plan in a credible fashion.
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