Risk in Entrepreneurship – Know About All The Risks In Entrepreneurship

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If you are an entrepreneur, then risk in entrepreneurship is common. Starting a business, and becoming an entrepreneur is a dream of many. Entrepreneur risks are challenging, and sometimes may lead to business failures.

Engaging in risks is a natural aspect of our everyday lives — whether it’s driving a car, embarking on a journey abroad, or deciding to try gas-station sushi during a road trip from years past (no judgment, we’ve all made adventurous choices).

Nevertheless, an entrepreneur’s journey is not suited for those lacking courage. Establishing a business from scratch requires determination.

Whether you’re well into the process of expanding your startup or just contemplating the notion of becoming your own boss, utilize this guide to make sure you’re ready to handle the challenges that come with entrepreneurship.


What is Risk in Entrepreneurship?

In the realm of entrepreneurship, risk is like the spicy seasoning that adds flavor to the business journey. It’s essentially the uncertainty and potential for loss that comes with every decision and action an entrepreneur takes.

Whether it’s investing capital, entering new markets, or introducing innovative products, there’s always a gamble involved. Risk in entrepreneurship means being willing to embrace the unknown, acknowledging that not every venture will pan out, but understanding that some risks can lead to remarkable successes.

It’s a delicate balance of calculated moves, gut instincts, and the occasional leap of faith that defines the dynamic nature of building and growing a business.

What is Risk-Taking in Entrepreneurship?

Although the term “risk” might evoke thoughts of chaos and unpredictability, in the realm of entrepreneurship, taking risks is a deliberate and calculated outcome of launching a business.

In entrepreneurship, taking risks involves the systematic process of recognizing, assessing, mitigating, and experimenting with potential opportunities and strategies. These endeavors aim to assist in building or expanding your business, but they also carry the possibility of personal or professional setbacks.

It’s essentially a strategic dance with uncertainty, where entrepreneurs weigh the potential gains against the potential losses in their pursuit of growth and success.

Different types of risk in entrepreneurship

In general, there are 3 types of risk in entrepreneurship:

1.  Preventable risks

2.  Strategy risks

3.  External risks

According to the Harvard Business Review, business risks fall into three main categories: preventable risks, strategy risks, and external risks.

1. Preventable Risks:

Preventable risks originate from within the organization, regardless of its size, and are entirely manageable; they should be avoided at all costs. Examples of preventable risks include deceiving potential investors, neglecting environmental regulations, or engaging in illegal business activities.

2. Strategy Risks:

On the flip side, strategy risks play a crucial and positive role in entrepreneurship. These risks emerge from strategic opportunities that hold the potential for a return on investment.

Launching a new product line, expanding into another country, or bringing in a new investor are examples of strategy risks.

3. External Risks:

The third category is external risks, which, as the name implies, come from beyond your business operations and are beyond your control. You’re likely to have minimal influence over current economic conditions or states of emergency, but they may still impact the success of your ventures.

Importance of Risk-Taking in Entrepreneurship

A study conducted at Harvard Business School in 2017 confirmed what many had suspected all along: having a penchant for taking risks sets the stage for a successful startup.

While those who naturally gravitate toward the unknown are more likely to delve into entrepreneurship, anyone can develop a comfort level with taking calculated yet audacious risks. There are distinct advantages to purposefully embracing risks when launching or expanding a business, such as:

1.  Gaining the first-mover advantage

2.  Swiftly learning from both successes and failures

3.  Cultivating an experimental mindset

4.  Developing skills in identifying and managing risks

5.  Fostering adaptability to change

In essence, successful entrepreneurs could very well dub themselves as Professional Risk-Takers, recognizing that continuous evolution and experimentation are integral to building thriving businesses.

Risk-Taking in Entrepreneurship Examples

It is very important to understand how to take risks in entrepreneurship, so that you can overcome any entrepreneurship burnouts. Here are 3 examples of risk-taking in entrepreneurship:

1.  Turning a side hustle into a full-time career

2.  Hiring your first employee

3.  Raising capital for your venture

1. Turning a side hustle into a full-time career

One of the initial questions that crosses the mind of every budding entrepreneur is: “When is the right time to transform my passion projects into a startup?” Dabbling in your business as a side hustle can be a wise move, as it reduces the risks associated with testing product-market fit and finding your initial customers.

Related: 33 questions to ask an entrepreneur

However, once you’ve constructed a proof of concept and generated some revenue, it could be the moment to bid farewell to the day job and fully commit yourself to your venture. For David Khim, the co-founder of Omniscient Digital, a content marketing agency, the decision to launch his business in June 2022 was even more challenging due to market conditions.

“This seemed like a risky time to dive in full time because we focus on services for B2B software companies, which were grappling with challenges in the market and experiencing widespread layoffs. We questioned if clients would cut us as part of cost-cutting measures. We wondered if these software companies would still be willing to invest in working with agencies,” Khim recounts.

“We pondered if we’d be able to secure a business loan if things went south. We questioned whether, if the business didn’t pan out, we’d be able to find new jobs.”

However, having already nurtured the business on the side for three years, the founders were confident in their company’s capacity to acquire clients, provide service, and maintain a healthy net profit margin.

Here’s a tip for navigating this transition: Before you take the plunge, ensure you have a robust business plan in place. While you can find numerous business plan templates online, it’s crucial to critically assess your financial performance and devise an exit plan.

Utilize the revenue figures from your side hustle and create financial projections to assess the feasibility of going full time with your company. And though it may sound a bit pessimistic, contemplate what steps you’ll take if your startup doesn’t take off. Incorporating an exit strategy with performance indicators and a timeline will prepare you for the worst-case scenario.

2. Hiring your first employee

Depending on your business model, bringing on your first employee introduces a range of risks. Firstly, there are the avoidable risks associated with ensuring you adhere to the mandatory hiring process to stay compliant with the law.

More significantly, there are strategic and external risks to consider. On the strategic front, you’re shouldering the responsibility for your employees’ livelihoods and adding to your business expenses. Make sure your business is equipped to sustain employment by critically assessing its financial performance and operations.

Despite your efforts to select the right person for the job, you still bear the external risks that the candidate may not be a long-term fit. However, these risks can lead to substantial rewards. Beth Kennedy, the founder of marketing agency SATT.co, experienced this firsthand. 

In August 2021, she decided to leave her job and pursue freelancing full time. In her initial five months, she swiftly went from having one client to five clients, immersing herself in work.

“I initially left my 9-to-5 for more freedom, and somehow I traded the 9-to-5 for a 24/7 work life. It was time to hire my first full-time employee. That’s when it all felt real: ‘What if this all disappears tomorrow? How can I be responsible for another person?'” Kennedy reflects.

After evaluating the risk of hiring her first employee, she was confident that her business had enough funds to cover an employee’s salary for five months — and then took the leap.

“I hired my first full-time marketing coordinator in January [2022] — she’s a dream come true. Not only has my business continued to grow since then, but both my employee and I are able to have flexibility in our schedules, leaving time for fun, creativity, and life.”

3. Raising capital for your venture

If there’s one thing that can intensify the game for entrepreneurs, it’s securing capital. Whether you opt for a line of credit, engage in fundraising through a business accelerator, or dip into Uncle Bob’s savings, the stakes for success rise when you bring in more cash.

Raising capital comes with various risks to consider. For instance, a failed business no longer impacts just you; it could result in significant losses for your investors. On the flip side, if you give away too much equity to gather funds, you might risk losing majority ownership and control of your business.

Despite the potential challenges, raising capital is a crucial element for many startups. Just ensure you conduct your due diligence, so you’re not taking on more risk than you and your business can handle.

How to Improve Risk-Taking in Entrepreneurship?

Whether you’re a natural risk-taker, a meticulous planner, or somewhere in between, here’s some good news: everyone has the potential to enhance their mindset when it comes to taking risks. Employ these tips to shift the way you perceive risk and boost the likelihood of achieving success.

Related: How to develop entrepreneurship mindset

Here are 3 ways how you can improve risk-taking abilities in entrepreneurship:

1.  Use a risk-assessment framework

2.  Start with smaller risks

3.  Build a culture that praises smart risk-taking

1. Use a risk-assessment framework

Consider utilizing the risk management framework from the National Institute of Standards and Technology. Although this government agency focuses on promoting American innovation and industrial competitiveness, you can easily apply this useful framework to any type of risk you face as an entrepreneur.

1.  Begin by identifying the risks your company might encounter.

2.  Categorize these risks based on their characteristics (e.g., product risk, market risk, etc.) and potential impact.

3.  Choose potential methods to mitigate the risks (e.g., bringing on a CTO, releasing a prototype to your target audience, etc.).

4.  Implement and test these potential mitigation methods.

5.  Evaluate the effectiveness of the mitigation methods.

6.  Authorize the decision to take on the risk.

7.  Monitor performance over time.

By following this systematic process for reviewing and evaluating risks, you’ll be better equipped to make informed decisions about which opportunities to pursue and ensure that you have effective mitigation techniques in place.

2. Start with smaller risks

All risks don’t carry the same weight. For example, opting to delve into your business ideas as a side hustle involves less risk compared to hiring your first full-time employee.

Related: 20 best product business ideas

If you’re in the early stages of entrepreneurship or haven’t ventured into many business risks before, think about giving preference to smaller opportunities that are simpler or less expensive to explore. This approach allows you to test and learn more frequently without the worry of substantial loss.

3. Build a culture that praises smart risk-taking

Company culture isn’t reserved for well-established businesses—entrepreneurs should be deliberate about defining the behaviors and priorities that matter most for their company right from the beginning.

Think about making smart risk-taking a fundamental aspect of your culture, even if you’re a solopreneur. Encourage everyone, including yourself, to embrace calculated and well-thought-out chances. Celebrate both successes and failures, as long as they align with the ground rules you’ve set for taking worthwhile risks.

Final Thoughts

Not every attempt is guaranteed to hit the bullseye. Even the most meticulously researched and promising opportunities might not unfold exactly as planned. That’s where risk-bearing steps in.

In entrepreneurship, risk-bearing means taking accountability for the risks you undertake and being ready to accept potential losses. As an entrepreneur, you serve as the primary line of defense when it comes to bearing risks. 

Depending on your business’s size and the scale of the risks involved, others like investors, employees, and customers could be affected. It’s no wonder stress management can pose a challenge for business owners.

But fret not—should a business opportunity go awry, you’re not left defenseless. Business insurance can play a crucial role in shielding your company from external risks, such as theft of company property.

Moreover, your chosen business structure can add an extra layer of protection against personal losses. For instance, launching an LLC can prevent your personal assets from being seized in the event of a lawsuit against your company.

Bearing risk is an inherent part of the entrepreneurial journey. However, armed with the right entrepreneur tools, you’ll be well-equipped to identify, evaluate, and handle risks like a seasoned professional.

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