Which Risks are Worth Taking?

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.

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.

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 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.

Victoria Yampolsky, CFA, is the President and Founder of The Startup Station, a comprehensive resource for modeling and valuing early-stage startups. She evaluates the financial feasibility of business models and specializes in the financial modeling and valuation of pre-revenue companies. She also created a finance curriculum for early-stage founders and launched The Startup Station’s educational program in 2015. Since then, more than 1,000 founders have attended her online and in-person finance classes and learned the basics of financial modeling, valuation, and startup financing.

Previously, Victoria worked for the Deutsche Bank Research Department and performed IT consulting for CapGemini’s Financial Services Division. Victoria holds a Bachelor’s Degree, Cum Laude, in Computer Science, with a minor in Mathematics, from Cornell University and an MBA, with honors, from Columbia Business School. Victoria is also on the Advisory Board of the Computing and Information Science (CIS) Department of Cornell University.