It is easy to mistake successful entrepreneurs as fearless visionaries who chased big ideas and bet everything in the process. Often though, the most accomplished founders rarely viewed their actions as “risky” to begin with.
In an interview, entrepreneurship professor Leonard C. Green explained, “Entrepreneurs are not risk takers. They are calculated risk takers.” This tells us that business owners are actually more methodical than the credit we give them.
Every time my co-founders and I started a business, made an investment or pivoted our strategy, we analyzed each new opportunity to ensure we’d have a high chance of success. Of course, there are some instances where we trust our instinct over data but, for the most part, we wouldn’t have grown our companies as fast as we have without a more disciplined approach to business-building.
In fact, every major decision we make these days starts with a rigorous investigation into its potential and pitfalls. Before we move forward with anything, we take the time to incorporate strategies that will mitigate risk. Below, I share three things we’ve learned in the process.
Evaluate risk logically rather than emotionally.
Fear is a remarkably powerful force and it can affect our preconceptions and actions in numerous ways. When fear is present it causes us to overestimate the downsides. In fact, many of the things that are commonly listed as people’s biggest fears, such as speaking in public and flying, carry very little risk.
Among entrepreneurs, fear can overwhelm the brain’s ability to apply logic to the situation, depriving you of worthwhile opportunities. As you weigh the negative scenarios, remind yourself of the emotional hold fear has and then work to evaluate your prospects with logic as the driving factor.
Create very clear goals in advance.
One of the biggest factors that prevents us from taking more calculated risks is the unknown. Fortunately, strategic business owners know how to hedge against unknown variables to mitigate their risk and increase their chances of overall success.
When you set clear and unambiguous goals for your organization, you’ll have an easy way to quantitatively evaluate its status in progress. You can also set a cap on the budget you’re willing to spend on different opportunities based on your assessment. For projects that are low-risk with a high chance of reward, invest heavily. For concepts that are high-risk, regardless of their potential upside, allocate a smaller amount of resources first to validate the idea before you decide to invest further or abandon the opportunity.
Get accustomed to saying “no.”
To get more comfortable with calculated risk taking, you need to learn how to pass on projects that have a high opportunity cost. This can be difficult for entrepreneurs who love to explore new ideas, but it’s a skill that’s necessary in order for you to apply a smart and strategic process to scaling your company.
As you build your business, you’ll realize you simply can’t juggle everything that comes your way. You’ll also notice that a few select campaigns are the biggest drivers of revenue, growth and profits. That said, it’s important you become selective about how you budget your time to allow you to focus on the things that will have the most impact on your key metrics.
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