How The Best Think About Risk Taking In Business

You’ve probably heard the expression ‘sink or swim’. I’ve caught myself saying that a few times. I was trying to make myself sound brave but I was just glossing over my stupidity.

Sometimes I’ve put myself at risk to challenge myself. But risk-taking in business, for the sake of it, is dumb.

According to Rita Mae Brown, Insanity is ‘doing the same thing over and over again, but expecting different results.’ Well, I might be insane.

Here’s what five years of dumb risk-taking in business looks like.

First, I started an investment fund (guilted my parents into investing with me) and hoped I could earn a living by pocketing 20% of the returns. I never considered I might not make enough money to cover my living costs.

Then I purchased a tiny hole in the wall type cafe. My total due diligence amounted to this question ‘Does it make money?’ – The seller answered ‘yes,’ so I signed the dotted line. He wasn’t lying, but $100 a week is hardly enough to live off. I eventually managed to sell that and move on.

Next, I brought a hair salon. I did a little more due diligence this time, but I wasn’t allowed to talk to the staff before settlement under the guise of privacy. It turns out that the staff didn’t want to work there anymore. You can read about how many headaches that caused me here.

Then, I purchased a gym. This time I talked to the staff before settling. I thought I had stepped up my due diligence game.

This time it wasn’t the staff I needed to be aware of; it was the customers. Many of them hated the place due to their experiences with the previous owner and couldn’t wait to leave. Also, there must have been a typo in the sales prospectus; the ‘400’ member gym I thought I was buying was actually only a ‘180’ member gym.

I forgot to mention I used debt to buy those businesses. You can imagine the fun conversations I had to have with my Bank and family members that I sucked in.

Each time I took one of these leaps of faith, events didn’t unfold as I expected. In every scenario, I ended up a hell of a lot worse off financially, emotionally and physically.

My ‘sink or swim’ moments put me through years of unintended stress and pain.

It wasn’t all bad. I’ve met great people, made life-long friends, learned about business and enjoyed many other moments along the way. But I can think of many smarter and less stressful ways to do that.

The biggest lesson I learned from these experiences is, don’t put yourself in those positions in the first place.

I falsely believed that good entrepreneurs are willing to put it all on the line. Instead as you might suspect the best view risk taking in business differently.

When Risk-Taking In Business Works And Doesn’t

They don’t just risk it all for the sake of it.

There are many wannabe entrepreneurs out there that are championing this mindset. I see it all over social media and blogs. It’s just not true.

You’ve might have heard about Elon Musk reinvesting all his proceeds from Paypal into, SpaceX and Tesla, which have been huge successes.

What gets missed in this story is the very valuable skill set and network that Elon acquired from building paypal. Even if he went to zero, he could quickly build himself back up. If all else failed, he also had two bachelor’s degrees in Economics and Physics to fall back on.

I think the lesson here is; you should only go for broke when.

1. The only person you’re going to impact if you fail is yourself.

2. You can quickly build yourself back up again because you have a valuable skill set and connections.

My mum’s partner often talks about how he has made millions and lost millions.

But now, at 60 years old, he’s back at zero. His skill-set is outdated, and he’s burnt the majority of his network from past failures.

Sure he can earn an income, he’s got many valuable practical skills, and there’s a chance he builds himself back up again. But if history is any indicator of the future, he’ll ‘go for broke’ again and finish at zero.

How To Take Risks Like The Best Entrepreneurs

The more risk you take, the higher your potential payoff should be. And the probability of you going to zero should always be zero.

You won’t hear Warren Buffet or Ray Dalio encouraging you to risk it all, for any amount of pay-off if there’s a chance you can go to zero.

Even eccentric entrepreneurs like Gary Vaynerchuck, Mark Cuban, or Peter Thiel talk about taking risks but not game-ending risks.

Taking significant risks can feel brave and exciting. But how will you feel tomorrow if you lose everything?

How will those conversations with your employees go when you tell them they don’t have a job anymore? What about telling your investors, friends, and family you’ve just lost all their hard-earned money.

There’s a personality issue here as well.

First of all, it’s often a tell that you don’t have enough patience to be a successful entrepreneur.

For example, – I used to be driven by money. I wanted to make lots of money fast. Essentially I wanted success without putting in the work. I didn’t have enough patience, which caused me to make silly decisions.

Making decisions out of desperation never leads to good outcomes. And neither does in my experience making decisions based purely on financial rewards.

Experience has taught me that there’s a reason you are at the financial or professional level you are at. That’s where you likely deserve to be.

In the long-run, rewards come to those who deserve them. Sure, life isn’t always fair, as no path is linear, but being patient and being prepared to work for success can only lead to good outcomes in the long-run.

My previous take-a-leap decisions in the name of “good risk-taking” were childish and not dissimilar to when I used to throw my toys as a kid when I wasn’t allowed a packet of Bubblegum. I wanted what I hadn’t earnt.

Asymmetric Risk Is The Best Risk Taking Strategy

Skilled entrepreneurs are always looking for asymmetric risk—a lot of upsides and minimal downside.

When Richard Branson started Virgin Airways, he agreed to lease some of Boing’s older 747 aircraft for one year. He sold tickets through his record stores and didn’t invest any capital into the business until he had a proven business model.

He didn’t go out and buy ten aircraft and set up a big office and hangars etc. He took an asymmetric bet with a big payoff if he won and little at stake if he lost.

When the world economy collapsed in 2008, Warren Buffet made several big bets on financial companies’ in trouble.

But he didn’t buy out the companies or give them huge loans; instead, he offered them convertible notes or warrants that he earned interest on while they were outstanding and converted to shares once the economy had recovered. His Goldman Sachs bet made him $3.1 Billion.

Don’t be ‘brave.’ Be smart; take risks that have high payoffs for low stakes.

One comment

Pingbacks and Tracebacks

  • Leave a comment