Risk and Reward- The Vital Two R’s of Business


We are risk takers by nature, all of us, in varying degrees. But marching into the unknown is a human instinct that manifests itself in obvious, as well as mysterious ways. Every hour of every day we take risks. You may allow your mind to explore this idea and find examples. Traveling to a new country, hiking an unmarked trail, buying a gift for a loved one, tasting a weird- smelling food, going to war, getting married, asking for forgiveness, climbing the Himalayas, camping, skiing, driving, falling in love, leaving home, and doing nothing is also a form of taking risk, yet indirectly.

For the sake of our topic, let’s narrow down that endless list to just one: Starting your own business and deciding to become an entrepreneur.

Why do people leave the comfort and security of a guaranteed pay-check, and go on their own? For starters, that comfort has become unattainable lately. Downsizing, mergers, acquisitions, financial crisis, to name a few, have made job security a thing of the past.

But that is not the main reason entrepreneurs go out and face the world alone. It is something within each and every one, a calling if you will. I bet you’ve heard this before and you might be thinking: “OK, a calling, but what is the percentage of success of that calling? Show me the money!”

True, no matter how strong a calling was, and how enthusiastic the person would be, a business venture must yield financial results. In other words: Money 🙂

That’s why, before delving in the ocean of entrepreneurship, one must evaluate few traits that are vital to making that journey a pleasant and fruitful one.

So what are those traits? The first that comes to mind is risk tolerance. I’ve talked about this, giving it an acronym of RT in several posts about investing, and it still applies here, probably more so. A low RT isn’t going to help here. A very high one would result in taking too much risk, and again that is dangerously dangerous 🙂

We are looking for a healthy RT, which on one hand drives the entrepreneur to explore new, uncharted frontiers, most of the time alone and with little knowledge and tools, and on the other, keeps him/her aware of the potential challenges, and do enough research and preparation ahead of, during and after taking the risk. What is that called in plain English? Wisdom combined with courage. And in eloquent English: Courageously wise or wisely courageous 🙂

The heart of our discussion here is the following:

‘Risk and Reward are proportional: The more risk one takes, the higher the probability of reward. The opposite seems to be true, most of the time.’

Let’s start with a simple example: If you decided not to teach your four-year old child how to ride a bike, fearing the risk of injury, you denied him/her the rewards that come with riding a bike. One of them is innocent joy!

To get any reward, we must do something, right? And any doing involves taking a risk, no matter how small. That’s why they are related proportionally.

Raise the level of one, the other gets a boost. The challenge is to find that threshold where raising too much would result in unwanted results rather than rewards. And that threshold differs depending on the situation.

In the example above, rushing the learning curve increases the risk of injury. Taking the matter way too slow may delay the reward or even prevent it from happening.

We need to be patient with the whole process. We start by taking small risks and observe our emotional and mental reactions, just like building, you start with a foundation, then keep adding to it.

Another aspect of this building process is appreciating the results, no matter how small.

When it comes to building a new business enterprise, the principle would be the same, however, the application is different.

Does that mean you start with a tiny little venture then expand gradually? That’s one way to approach it. Say open an online store with only one product line, give it your best till it starts making profit, then add a second product line, and so on.

Nevertheless, if you know that your RT is high enough to get into bigger business adventures, especially if you know you have good financial and practical backing by trusted partners, then you may want to create a vision that would lead to more aggressive plans. For example, starting an eCommerce platform, where small business owners can open their one-product-line stores.

The web is full of tools and articles on how to assess your RT level. Here’s one, which I have no affiliation with, and can’t guarantee its results, but you may want to give it a shot, or look for something else in that line of tools:

http://www.moneycontrol.com/personal-finance/tools/risk-assessment-tools.html

In conclusion, know thyself before starting a new business. The time, money and energy spent doing that is worth the clarity that result from being aware where your next step will hit the ground.

All the best,

The WEalth MAker

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