If you listen to or read material about startups and entrepreneurialism, then you’ve probably heard over and over that you have to take risk! Be a risk taker! Risk! Live out of your car! Max out all of your credit cards! So let’s look at that a little bit shall we.
What is risk?
a situation involving exposure to danger.
What is “Risk Tolerance”
The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important component in investing. An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Investors who take on too much risk may panic and sell at the wrong time.
That definition of “Risk Tolerance” comes from Investopedia. I think that’s somewhat relevant in the case of entrepreneurialism because most of what we try to figure out deals with money at some point or another.
So Investopedia also has this article about determining your risk tolerance. One of the most important takeaways I think here that a lot of people miss from most of the startup material that’s put out there, is that not everyone has the same risk tolerance.
Right now, I have low risk tolerance. It’s important to me to have security. I want to know that I can make my house payment, fix my car when it breaks, pay my phone bill and don’t forget internet! There are all kinds of risks that people may not be willing to take for various reasons. There may be consequences to taking on less risk, probably something to do with the rate of growth that you can obtain for your ideas. I think a lot of the time a person will be ok making that trade off. It doesn’t mean that you can’t increase your risk tolerance later on too.
When you’re reading those articles or listening to speakers or podcasts that keep saying that you need to take more risk, they might have a different objective or end goal than you do. We can’t all make $1billion dollar businesses! If you do want too that’s great and don’t stop until you make it! If you want to create a $100,000 business the same is true! Don’t stop until you make it! But you have the power to decide how much risk you’re willing to take on.
Another thing that I have started to notice is that these people that yell from the mountain tops to take huge risks, also seem to have a different definition of risk.
Richard Branson points this out nicely in a blog post entitled “The Art of Calculated Risk”
Always protect the downside. I think it should be a guideline for every entrepreneur — or anyone involved in business ventures. – Richard Branson
In the end the kind of risk and the amount of it that you take on is up to you. Your risk tolerance can change over time. If you have an idea that you’re passionate about don’t think that in order to see it through you would have lose your house or ruin your credit score to test it out. Go out there and do stuff!