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How to Balance Business Risk Versus Opportunity

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There is no real business opportunity without risk. Serious entrepreneurs know that, but too many “wannabes” still fall for that elusive dream of a get-rich-quick scheme with no risk. As an active Angel investor, I still hear entrepreneurs asserting large opportunities with minimal risk or no competition. My conclusion either way is that there is no market or they haven’t looked.

According to a new book by serial entrepreneur and former racecar driver Tom Panaggio, “The Risk Advantage: Embracing the Entrepreneur’s Unexpected Edge,” smart business owners embrace two essential risks to every opportunity – decision and change. First, they decide on a direction to jump and then they make adjustments and innovations to keep going and growing.

In simple terms, the way you balance risk and opportunity is to look at both as two sides of the same coin. Obviously, you are looking for the opportunity side to be bigger than the risk side. Great entrepreneurs have learned how to realistically assess and manage both sides of the coin in the following business opportunity and risk categories:

  1. Strategic. Visionary entrepreneurs tend to identify and map strategic new opportunities, rather than grow existing current ones, based on market insights emerging technology. The risks in new opportunities are usually not evident, so the challenge here is to reduce the probability that the assumed risks actually materialize and to improve the company’s ability to manage or contain the risk events, should they occur.
  2. Financial. Both risks and opportunities in this area can arise from many aspects of your startup, before and after product development. First, you need to assess the risks and value of investor funding and carrying debt. Then you walk the delicate balance between burn rates, revenue flows versus expenses, investment in marketing and employees.
  3. Operational. Once a business is operational, the opportunity can be maximized and risk managed through best-of-breed processes and a rules-based control model. Examples are the risks from employees’ unauthorized, illegal, unethical or inappropriate actions and the risks from breakdowns in routine processes.
  4. Growth. The way you scale your business is a huge balancing act between risk and opportunity. You can grow organically or stretch out with big capital investments for volume and reach. Grow too fast and risk quality and delivery ability, or go slowly only to be overtaken by your competitors or a new technology. Find the balance.

For entrepreneurs, both Panaggio and I agree that the first step is adopting a winner’s mindset and not become a prisoner of hope. When entrepreneurs become prisoners of hope, they look for others to solve their problems. After that, the key is to embrace risk, rather than fight it, which gives you the real advantage:

  • Embrace the risk of failure. Every entrepreneur must realize that failure is not defeat, but a signal that it is necessary to invoke the two essential risks: decide that change is necessary, and change. Every investor believes that entrepreneurs learn more from failures than from successes. Short-term failures lead to long-term successes.
  • Embrace the risk of proactive marketing. Marketing is fraught with risk, but playing it safe or no marketing is the ultimate risk. Proactive marketing is a marketing strategy that focuses on one objective – to generate customers now. Look at marketing as an investment, not an expense. Risk being known for who you are, as well as what you sell.
  • Embrace the risk of standing in your own line. All entrepreneurs should face the risk of being one of their own customers by using their own products and standing in their own customer service lines. Only shortsighted leaders assume that customers have unreasonable expectations, or their demands will increase once you have a relationship.

Embracing risk and learning from your mistakes really is an entrepreneur’s edge, since only startups and small businesses can afford to fail quickly, maybe multiple times, and all the while having the ability to pivot quickly to achieve success. In fact, these are the keys to balancing the risks against the opportunities. When was the last time you felt your business was in balance?

Reprinted by permission.

Image credit: CC by Adrian Hodge.

About the author: Martin Zwilling

Martin is the CEO & Founder of Startup Professionals, Inc., a consultancy focused on assisting entrepreneurs with mentoring, business strategy and planning, and networking.

Martin for years has provided entrepreneurs with first-hand advice, mentoring and business plan assistance as a startup consultant. He has a unique combination of business and high-tech experience, and executive mentoring and connecting startups with potential investors, board members, and service providers.

  • bert shlensky

    This is all interesting but it is really more valid if you quantify the risks versus the opportunity even if the analysis is subjective . Also both have different values for various parties . A V.C. firm expects many investments to fail while waiting for a hit which a small entrepreneur can’t afford to fail . Conversly meeting expenses may be the main criteria for an entrepreneur while return on investment is the important criteria for investors

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