WHY RISK TOLERANCE IS KEY TO ENTREPRENEURS’ SUCCESS (2023)

August 8, 2018
by Nick Grouf

WHY RISK TOLERANCE IS KEY TO ENTREPRENEURS’ SUCCESS (1)

(Video) Do you need to be risk tolerant to be an entrepreneur? By Derek Lidow

There is a single underrated, under-examined quality quietly but powerfully defining the arc of your career and the shape of your life. It underpins your educational path, your interpersonal relationships, your professional pursuits, and your net worth. It influences your choices large and small, from what you’ll order for dinner tonight to when you’ll have your first child, from the outfit you chose from your closet this morning to the career you are — or aren’t — pursuing. This trait determines both the texture and the speed of your days, and in high doses, it is the fundamental ingredient that unites all successful entrepreneurs: risk tolerance.

It is impossible to start your own venture without a high metabolism for risk. Matched with resilience, intelligence, and a dose of luck, high risk tolerance can lead you to greatness. At the same time, low risk tolerance can keep you stuck in patterns that will leave you unfulfilled, as you watch others take the leaps and dives you dream of from afar.

As a venture capitalist and entrepreneur with over 20 years of experience, I have watched the paths of countless individuals be shaped by their personal levels of risk tolerance, and I have seen how necessary a high tolerance for risk is to entrepreneurial success. Of course, risk tolerance is not a fixed quality: it can be developed and harnessed with intention.

I have also been surprised by the ways in which changes in circumstance can strengthen, reduce, or simply expose our true tolerance for risk. Counterintuitively, I have seen dozens of new parents decide that it’s time to take the plunge and start their own company or join an early-stage, high-risk start-up. I’ve also seen individuals perfectly positioned for a big career change weaken their resolve at the last moment. Often, it is difficult to know our true risk tolerance levels until we are put under pressure: like an egg in boiling water, our resolve can harden, or it can crack.

(Video) The Best Risk Tolerance as an Entrepreneur? With Ami Kassar

Our tolerance for risk is often influenced by our formative years, and whether or not those around us typically rewarded or discouraged risk-taking. But if you are serious about building your career as an entrepreneur, you can and must take active measures to increase your risk tolerance and grow comfortable with the precarity and unpredictability of the path you have chosen. Studies of the entrepreneurial personality have shown that along with innovativeness, proactiveness, self-efficacy, and a need for achievement, entrepreneurs are individuals who, when compared with their peers, cope better with stress, and respond more quickly to problems, and with fewer inhibitions. This willingness to dive in, and ability to thrive under pressure, are fundamental characteristics of a high tolerance for risk.

Though recent years have seen the entrepreneurial path become somewhat more mainstream, it is still, on the ground, a path marked by uncertainty and instability. That is the nature of creating something truly new. Often, individuals who think they’d make excellent entrepreneurs turn out to be lousy ones not for lack of intelligence or skills or networks, but for sheer lack of risk tolerance once the going got tough. In a widely-cited study conducted by Charles Holt and Susan Laury for the American Economic Review, individuals were asked to participate in low-stakes and high-stakes lotteries. Some participants were asked to play with real money; others were asked to play only hypothetically. In each option, participants were offered a choice between risky and less risky actions.

When faced with hypothetical high-stakes opportunities, most participants chose to take the less risky action. When faced with real, money-bearing high-stakes opportunities, even more participants chose the less risky path. In short, most individuals back down when faced with a high-risk situation in which both gains and losses might be large. Entrepreneurs are the rare breed who not only hold steady in such high-stakes scenarios, but seek such opportunities out.

Starting a business or joining an early-stage start-up means risking your social status, your income, and much of your free time; it means risking years of loneliness and years without proper support. It means putting your energy, your financial standing, your social capital, and often years of your life on the line for a high-risk, high-reward, high-failure path. A 2010 study also in the American Economic Review found that in three-fourths of cases, entrepreneurs made almost no money off of their equity. Average returns also remained quite low.

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It is no secret that the vast majority of start-ups fail; but most do not know just how daunting those statistics can be when you’re faced with living them. It is easy to dream, from a distance, that you will be the one to succeed; it is harder to stay steady in light of the odds when you’re finally on the diving board, faced with taking the plunge.

Of course, a high risk threshold will only get you so far. Once you’ve taken the risk of beginning the entrepreneurial path, as a founder or early-stage employee, a second quality comes into focus: your ability to process risk, as you metabolize it. Processing risk means working hard to mitigate unnecessary instability and breaking down your company’s [risks ] into manageable components. And when mitigation is not possible, successful entrepreneurs develop strategies to manage risk over time. Steve Jobs, perhaps the most visionary and admired entrepreneur of all time, was a master of managing risk: from his early failures he learned what risks were worth taking, and which were not; he learned when to trust his risk-taking instinct and when to reign it in. Jobs’ time at Apple was marked by large risks and even larger innovation; in the years following his firing, the company experienced an ‘innovation discount’ of 31%. After his return, the company’s innovation premium grew to 52%.

Investors are looking for companies led by individuals who are not only risk tolerant but risk-savvy, capable of judging when a risk is worth taking and when a risk is needless while simultaneously managing the stress latent in any high-risk enterprise. For some, the stress, not the risk, is what cuts their business short: as it grows, a company’s success is dependent on its team’s ability to cope well under pressure, tackling the necessary tasks even in the most stressful, doubt-filled times.

For those who have that metabolism for risk and stress, the rewards, when they come, are substantial. This is why founders and early-stage employees — the ones who take the biggest leaps, and risk the most — are typically given the most equity. Because risk tolerance, so central to our lives, is often taken for granted, ignored, or simply not cultivated, there are lucrative, challenging, and fulfilling opportunities for those who know how and when to cope with high levels of risk. This path is rewarding because so few choose to take it. The vast majority of individuals, skilled and driven as they are, have mediocre risk thresholds: if everyone had a high tolerance and appetite for risk, entrepreneurship would not be so lucrative and rewarding. (There would also be far fewer doctors, lawyers, professors, and bankers; a low tolerance for risk doesn’t mean a person is doomed to failure. More often than not, low risk tolerance leads individuals to enter secure and profitable career paths; they just don’t become entrepreneurs.)

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There is an intuitive art to risk tolerance and risk management: some are born with that intuition, and the rest of us work at it day to day. It is that first big plunge — the decision to leave a more stable path, and begin forging your own business and bringing a brand-new idea to life — that throws off the vast majority of people. But those who weather that risk with grace and take the dive often find that the sheer act of embracing a large risk makes subsequent risks easier to swallow. I once mentored an aspiring entrepreneur who for years had dreamed of starting her own online shop for an in-demand product. This was in the early years of the internet, when few if any such online businesses existed. Though this aspiring entrepreneur had all the know-how, intelligence, and verve to make her idea a reality, it took her years to gain the courage to stomach the risk of leaving her stable, albeit miserable, job. When I finally asked her why she kept delaying, she replied, “Because if I fail, I will have no more dreams left.” To her, postponing her dream was a way of preserving it: her fear of failure meant she preferred the fantasy of being an entrepreneur to the reality of risking so much for so uncertain a reward. But when she finally realized the irony and absurdity of denying herself her biggest dream, she built up her risk tolerance, left her unhappy job, and started her company. Instead of finding herself with “no dreams left,” she soon found herself at the center of a challenging but thriving business.

At the end of the day, when you’ve embraced the entrepreneurial mindset, what seems like a large, unfathomable risk to others will seem to you like a savvy, strategic play. When I finished Harvard Business School, I received one of the highest-paid job offers in my graduating class; I had the prospect of total financial security, in an interesting field, with a great boss. But the seeds of a new entrepreneurial idea had taken hold of me, and I knew I had to give those seeds a shot at growing tall. As I sat on my plane ride to New York to turn down this coveted job offer, I felt sick to my stomach, overcome with fear and worry. But by the time I walked into my would-be boss’s office, I had that rare sense of clarity that comes from taking a risk you truly believe in. That clarity was evidently apparent to my would-be boss, too; after asking me to explain why I was turning down his offer, he heard my business pitch and ultimately became my company’s first investor. Though the rest of my early entrepreneurial journey wasn’t always smooth sailing, my calculated risk — equal parts leap of faith and leap of savvy — quickly began to pay off. My business thrived, leading me down a path far more fulfilling, enriching, and valuable than the less risky roads not taken.

If you’re at the early stages of building your own company, you’ve taken that leap, and you know how it goes. If you’re still climbing the diving board, wondering if you’ve got it in you: take a step up to the edge, and take a bet on yourself. Your tolerance for risk might surprise you.

This story was originally published on our company webiste.

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FAQs

What is the main risk for an entrepreneur? ›

Key Takeaways

Entrepreneurs face multiple risks such as bankruptcy, financial risk, competitive risks, environmental risks, reputational risks, and political and economic risks. Entrepreneurs must plan wisely in terms of budgeting and show investors that they are considering risks by creating a realistic business plan.

What does it take to be a successful entrepreneur? ›

While there is no magic formula for beings a successful entrepreneur, those who do succeed tend to have mastered the following set of skills: good and effective communication; being able to sell both themselves and their idea or product; strong focus; eagerness to learn and be flexible; and a solid business plan.

What refers to the entrepreneur's tolerance of business risks? ›

The term “risk tolerance” is often used in the context of investing, referring to the amount of variability in returns that an investor is emotionally/mentally able to stand.

What is the meaning of risk-taking in entrepreneurship? ›

: the act or fact of doing something that involves danger or risk in order to achieve a goal Starting a business always involves some risk-taking.

Why is risk important in business? ›

Without an effective risk management plan, a business cannot define its future objectives. Arguably one of the most important aspects of an organisation, risk management done right is what protects an organisation against losses and equally enables it to capitalise on opportunities.

What are the risks and benefits of becoming an entrepreneur? ›

The pros and cons of being an entrepreneur
  • Pros.
  • Freedom. There's no denying that one of the best parts of being an entrepreneur is the complete freedom you have to do your own thing. ...
  • Flexibility. And with all that extra responsibility comes flexibility. ...
  • Control. ...
  • Profits. ...
  • Cons.
  • Responsibility. ...
  • Risk.
17 Jul 2018

What is risk tolerance example? ›

A police officer patrolling a road with a 70-mph limit might, for example, decide that they are only going to pull over vehicles traveling at 80 mph or faster. This is an example of risk tolerance: The officer is willing to tolerate deviations of up to 10 mph from the posted speed limit.

How would you describe risk tolerance? ›

What is risk tolerance? Simply put, risk tolerance is the level of risk an investor is willing to take. But being able to accurately gauge your appetite for risk can be tricky. Risk can mean opportunity, excitement or a shot at big gains—a "you have to be in it to win it" mindset.

What is meant by risk tolerance? ›

Risk tolerance is related to the acceptance of the outcomes of a risk should they occur, and having the right resources and controls in place to absorb or “tolerate” the given risk, expressed in qualitative and/or quantitative risk criteria.

How does risk taking lead to success? ›

Risk-taking enables and encourages innovation, which can be an important product/service differentiator. Failed risks aren't always negative. Sometimes, they provide the most valuable business lessons an entrepreneur can learn. Failure helps shape future business strategies and can eventually lead to business growth.

Why is it important to take risks? ›

Once you start taking smaller well- informed risks in daily life, it will create a positive pattern and motivate you to take chances on larger, more significant things to achieve your greatest goals. Take every risk and drop every fear because we only regret the chances we don't take.

Why is it important to take risks in life? ›

Taking risks can change you fundamentally. They make you braver, stronger, and more confident. They show that you have what it takes to make a decision, commit, and create the life you want. You build faith in yourself knowing you have done it before and can do it again.

What is risk and why is it important? ›

Any factor or event that creates uncertainty in achieving organizational objectives is “risk”. These risks can be in the form of financial uncertainty, strategic oversight, legal liabilities, IT and data-related threats, or natural disasters.

What is the most important rewards for successful entrepreneurship? ›

As an entrepreneur, you can pursue your passion and also make money, while being your own boss. Once the starting period of pitfalls and hurdles is over, you can start reaping the benefits of your hard work and sacrifice. Entrepreneurship provides you with the freedom to control and shape your professional life.

What are the key benefits of entrepreneurship? ›

Entrepreneurs have been instrumental in spurring social change and improving the way people live and work. They help raise the standard of living for everyone by creating jobs and making products safer, less expensive, and more functional.

What is the greatest key to success? ›

5 Keys to Success
  • Build high self-esteem Believe in yourself, have confidence, like and feel good about yourself, take pride in what you do.
  • Focus with a positive attitude Always expect the best possible outcome for what you do. ...
  • Set powerful goals Give your brain a place to aim. ...
  • Persevere Never quit.

Is key Or is the key to success? ›

Hard work is 'key to success' is the correct one. It is famous proverb which means hard work leads to success.

What are 3 important keys to success? ›

'” There they are. Three Keys for Career Success: communication, confidence, and character.

How do you develop a risk tolerance? ›

Here are six ways you can increase your risk tolerance.
  1. Emergency Fund and Short-Term Savings. ...
  2. Income Diversification. ...
  3. Understand Investment History, Theory, and Expected Performance. ...
  4. Understand All the Risks You Face. ...
  5. Develop Entrepreneurial Skills. ...
  6. A Change in Attitude.
9 Jun 2016

What is a good example of tolerance? ›

Personal tolerance is when an individual expresses acceptance of a person on an individual, intimate level. An example of this is Jimmy and Tommy, two friends who have completely different styles of music. Jimmy still lets Tommy play his music in the car, even though he really doesn't understand it.

How many risk tolerance factors are there? ›

There are three different levels of risk tolerance involved: Aggressive Risk Tolerance. Moderate Risk Tolerance. Conservative Risk Tolerance.

What do you mean by risk tolerance discuss the factors affecting it? ›

Risk Tolerance Definition. Risk Tolerance is defined as the amount of risk the investor can tolerate before deciding to exit the market and usually depends on the investor's financial situation, type, preference of asset class, time horizon, and purpose of investments.

What is objective risk tolerance? ›

Risk tolerance.

Each investment strategy should include an appropriate mix of investments, based on the customer's objectives. Risk tolerance is the amount of risk you're willing and able to accept in order to pursue your financial goals.

What are the 5 important skills of a successful entrepreneur? ›

What Are The Most Important Skills Entrepreneurs Need?
  • Curiosity. Great entrepreneurs are tasked to discover new problems, reveal potential niche opportunities, refactor their original business process, and innovate. ...
  • Time management. ...
  • Strategic thinking. ...
  • Efficiency. ...
  • Resilience. ...
  • Communication. ...
  • Networking. ...
  • Finance.
11 Sept 2017

What are the 4 key points that make a successful entrepreneur? ›

4 Characteristics of Successful Entrepreneurs
  • Ambition and self-confidence.
  • Willingness to take a leap of faith.
  • Ability to learn from mistakes.
  • Trust in and respect for the team.
7 Jan 2013

What does it take to be successful? ›

You Need Goals

Go ahead, set yourself some challenges; start with realistic challenges that you can achieve before moving to the more grueling ones. Having predetermined goals helps you with direction. Your goal could be exclusive employment training, an academic upgrade, or even working on your fitness.

What are the most 3 important characteristics of successful entrepreneurs? ›

10 Characteristics of Successful Entrepreneurs
  1. Curiosity. Successful entrepreneurs have a distinct personality trait that sets them apart from other organizational leaders: a sense of curiosity. ...
  2. Structured Experimentation. ...
  3. Adaptability. ...
  4. Decisiveness. ...
  5. Team Building. ...
  6. Risk Tolerance. ...
  7. Comfortable with Failure. ...
  8. Persistence.
7 Jul 2020

What are the three important skills that a successful entrepreneur has? ›

Adaptability, persistence and hard work, these are the keys to success in small business, but they are three important attributes no matter what your endeavor.

What are the 3 main things an entrepreneur needs in order to be successful? ›

3 Traits Every Successful Entrepreneur Must Have, According to the Experts
  • Successful Entrepreneurs are Resilient. ...
  • Successful Entrepreneurs are Confident. ...
  • Successful Entrepreneurs are Innovative.

What makes someone truly successful? ›

Successful people are confident and can lead themselves, as well as others. They have their own vision and mission and seek to bring it to life on a daily basis. They also know who they aren't and don't waste time on things that they aren't good at or they aren't satisfied with.

What are 3 important keys to success? ›

'” There they are. Three Keys for Career Success: communication, confidence, and character.

What is the most important trait for successful entrepreneurs? ›

Deep Passion

Work ethic and passion go hand in hand. It takes work ethic to keep the business strong, and it takes passion to feel motivated enough to maintain a good worth ethic. I believe passion is easily the most significant personality trait any successful entrepreneur has, and for obvious reasons.

What are the most important skills that entrepreneurs need? ›

Developing the following skill sets can also help you develop your entrepreneurial skills.
  • Business management skills.
  • Teamwork and leadership skills.
  • Communication and listening.
  • Customer service skills.
  • Financial skills.
  • Analytical and problem-solving skills.
  • Critical thinking skills.
  • Strategic thinking and planning skills.

What do all successful entrepreneurs have in common? ›

10 Common Characteristics that entrepreneurs share
  • Love What You Do. The best entrepreneurs are the ones who are driven by passion. ...
  • Have a Competitive Spirit. ...
  • Be a Serial innovator. ...
  • Have a strong sense of basic ethics and integrity. ...
  • Not being afraid of failure. ...
  • An eye for niches and gaps in the market. ...
  • Have Passion. ...
  • Have Drive.

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