Risk is easy to understand. Growing up, we heard daily reminders of risk: “Don’t play in the rain – you can get sick.” “Look both ways when crossing the street.”
When we get older we learn to view risk as an admission fee for reward. The person you like won’t go out with you if you don’t ask. To get a job, you have to apply. Later still, we learn that higher rewards involve higher risks.
Clearly, turning recognised opportunity into reward requires risk.
Money is the first risk most people see. But entrepreneurial risk is deeper and more nuanced. Reputations are at stake. Entrepreneurs also invest – and risk – time and opportunity cost. They wager intellectual capital – exposing their entrepreneurial ideas to the market.
To many would-be entrepreneurs, the risks are roadblocks that keep them on the sidelines. Risk of losing $1,000 in needed startup funding may be unthinkable. Or the risk of leaving a steady job may be too much.
And there are non-financial costs to consider.
In Japan, for example, an unsuccessful business endeavor is so damaging to a person’s reputation that those who don’t succeed are forced to move away so they don’t shame their community. This heavy risk barrier is part of the reason startup entrepreneurship in Japan is among the lowest in the world.
In a classroom setting, we can reduce risk and create a safe place for students to try and practice entrepreneurship. Even in the safe classroom space, the notion of getting up in front of 30 of their peers and presenting an idea is loaded with social risks. But they learn how to assess these risks and move past them.
The real world isn’t as simple. Businesses fail. Risks and consequences are real.
Good advice for all potential entrepreneurs, whether in a classroom or at a kitchen table, is to be clear and objective about the risks of acting on recognised opportunity. Sit down and write them out.
Make honest assessments about what your effort will cost in dollars, days and other, less immediate ways. Think of everything you write down as a loan you’re making to your idea – a loan which may never be paid back.
Once you have your risk list, look for ways to reduce or manage it.
To reduce the financial risks, those considering a new idea or product often think about approaching angel investors or venture capitalists. Unfortunately, especially as a first-time entrepreneur, luring early investors can be especially tricky, time consuming and unrewarding. But if outside funding is mandatory to the success of your opportunity, do your homework.
Instead of chasing angels, most small, first-time and young entrepreneurs approach family and friends for backing – people who are as likely to invest in them as their ideas. Keep in mind, however, that regardless of who you’re asking to invest, putting up your own money too demonstrates confidence in your idea.
Another great way to lower risk is to get advice from mentors who can give early insight and analyse risk. That’s why, in addition to our teachers, we infuse our classrooms with volunteer mentors and experienced business leaders.
Outside the classroom, there are entrepreneur and mentor networks, such as the successful and aptly named MeetAdvisors in Chicago. There, and in similar hubs around the world, those with new ideas or new businesses can connect with those who can help them understand and manage their risk.
Unfortunately, there’s no textbook answer to knowing when the risk outweighs the reward. Or the other way around.