Run (up) after answering these three risk questions

Entrepreneurs take risks, sacrificing everything to change the world. Let me know if this sounds familiar: A father of four is risking his home and the livelihoods of his wife and children in an attempt to fulfill his dream. Taking out another mortgage on his home, his business is booming and everything works out. But what happens when it doesn’t?

Risk taking is important; that’s part of being an entrepreneur. However, there is a fundamental difference between calculated risk and complete recklessness.

I opened my first company in my last year of undergraduate studies. It was called Puresweats and was dedicated exclusively to supplying the highest quality sweatpants made in Canada. I hired a designer from a local fashion school and set out to build the first piece. After a couple of iterations, I found a clothing factory to work with.

After wearing and washing the final product for several weeks, I realized that this was not the premium product that I originally envisioned. They were good clothes and I never got any complaints, but it was clear to me that they needed to be sold at a price that made the business unsustainable.

Entrepreneurs are told they must burn bridges behind them. Not. Recovering from a 5-foot fall is much easier than recovering from a 100-foot fall. Here are three risk-related questions you should answer before you begin.

1. What are your shortcomings in knowledge?

How much do you know about the business you are planning to start? Are you starting in the industry with no prior experience, or is your startup an extension of what you already do? With Puresweats, I had no experience designing and retailing clothes. It was a tough battle on a sinking ship.

My new venture is a local English writing, editing and teaching company. I have been doing all three for the last seven years. In fact, most of my income comes from teaching a class in which I was a teaching assistant. The transition was easy.

But what if you want to try yourself in a field in which you have no experience? I would recommend getting a job in this or a related field to learn day to day operational challenges. An added benefit is that any mistakes made at work will not affect next month’s rent.

An entrepreneur is willing to sacrifice almost everything to be an entrepreneur. Sometimes that means sacrificing entrepreneurial status—for a while.

2. How much money are you willing to risk?

When my first company failed, I lost my original $5,000 budget. I knew that going into it, there was a high risk of failure. I didn’t think it was okay to fail, but I refused to ignore the possibility.

My initial budget came from the concept of bankrolling that is used by most, if not all, serious poker players. To play at a certain table, you need to increase the buy-in amount by 20 times. So a $200 buy-in requires a $4,000 bankroll. This helps protect you from variance, which often puts players out of action in a single pre-flop, all-in hand.

There may not be as much fluctuation in business as there is in poker (even worse in some cases), but there are a number of variables that you cannot control. Greater risks and greater volatility require a larger bankroll. If I were to relaunch Puresweats with what I know now, I would scour the world for the best fabric. This would mean significant travel and living expenses with no guarantee that I would reach my goal. This is a high risk move and I would be uncomfortable without a reasonable financial reserve.

Simply put, don’t risk more than you’re willing to lose. Always have a plan B and be prepared to increase your bankroll when you raise your bets. If your bankroll isn’t strong enough, consider sitting it out for now.

3. How can the MVP approach be used effectively?

The minimum viable product (MVP) approach encourages testing specific underlying assumptions in the cheapest and fastest way possible. While the testing phase can extend the product development life cycle, the risk mitigation process ensures that your capital is only used as needed and the final product includes a history of user feedback and testing.

For Puresweats, I decided to take the MVP approach by producing a limited amount of inventory. However, I have not been able to adequately test at sufficient intervals. I’ve assumed too often that all is well enough. For my new company, I advertised on Craigslist instead of building a website. Until it became clear that people were willing to pay me to help, I didn’t want to invest in registering as a business or printing business cards.

Always dig deep to discover your hidden assumptions, and be patient in the process. I was so tired of being a hot entrepreneur that I just wanted to make progress. However, rushing the process will not lead to anything. It is better to do the right thing slowly than to do it wrong quickly.

Your goal as an entrepreneur is not to wear risk as a badge of honour, but to take calculated risks in small doses. Risking it all sounds exciting, but remember, it’s darkest just before dawn, but darkest just before dark.

Stefan See holds a Bachelor of Business Administration degree and is working towards becoming a CPA. He is also the founder and president WriteThisWaya local English language writing, editing and tutoring company based in Vancouver, British Columbia.

Related Post: Why Your Company Should Never Stop Taking Risks

LEAVE A REPLY

Please enter your comment!
Please enter your name here