Unlike popular belief, the best entrepreneurs understand how to make risk work for them.
When you ask most people to use a word or phrase to describe entrepreneurs, you’ll often hear “risk taker.” The perception is that most entrepreneurs are gamblers by nature and are often willing to take on a lot of risk to make their dreams come true.
While most entrepreneurs do likely have a risk tolerance that’s greater than average, most are not wild risk takers — they are actually risk managers.
So, what’s the difference?
Taking Risk Versus Managing Risk
A risk taker is someone who takes wild and crazy risks with an unknown probability of success. They are willing to risk just about anything for the chance to win an outsized payout. This is putting all your chips on a single number on the roulette table and hoping for luck.
A risk manager, on the other hand, is someone who is very thoughtful about the risks they are willing to take. They’ll also do everything they can to minimize the possible downside to any outcome. You are more likely to find entrepreneurs at a poker table, reading the players and the flow of chips to get extra information and reduce the risk of their betting. They’ll know the probability of winning with the cards in their hand and the cards on the table at any moment before they push all their chips in.
While entrepreneurs may look like they’re taking crazy risks, you’ll find that most of them are very analytical about their decisions. By their very nature, they’re thoughtful about understanding the balance between the potential upsides and downsides of their decisions.
In that way, they may look like they’re willing to take a lot of risk to an outsider — but it’s not the kind of crazy risk people might think.
Shooting for the Stars
Let’s look at the example of Elon Musk and Tesla. When Musk decided to build a company around making electric vehicles (EVs), it looked like a crazy risk to many people. But for Musk, it was a calculated risk. He knew, for instance, that all the technology he needed to build his EVs already existed. The batteries, AC drives, wheels, chassis, and electronics could all be acquired. He didn’t have to take on any risk in trying to develop those things himself. Frankly, the rest of the original vehicles was all known technology with limited risk.
Where the managed risk came into play was understanding the cost structure of selling EVs. Musk knew that his early vehicles were going to be expensive to build, more than he could charge. That continued to be the case until he managed to build enough to achieve economies of scale and reduce the costs. This concept was also well-proven by manufacturing firms for decades, as well as confirmed by Moore’s Law. But he also knew that consumers wouldn’t pay that much for his early EVs. So he made the decision to sell cars at a loss to help create the EV market and let the learning curve drive to profitability.
That was a calculated risk that might have looked crazy to some people. But when you dig deeper, you see that it wasn’t all that risky for Musk. Every single risk element had been considered and managed, with plenty of proof that each was possible. After all, he had already started and sold one successful business — PayPal. That meant that even if Tesla failed and he lost a bunch of money, he knew he had enough of a cushion to land on that it wasn’t going to ruin his life.
Similarly, when Musk launched Space X people again questioned the risk involved. Yet again, Musk did the calculation and understood that the upsides of putting existing technology to use to launch rockets into space far exceeded the downside if he should fail. But, on the upside, he was putting in place the kind of business that would open the stars again to mankind.
Stop Worrying and Start Living
I’ve written before about the wise words of Dale Carnegie that when any of us are faced with a tough decision, we need to figure out how to maximize the upside while learning to accept the downside. If you can arrive at a solution where both those elements are in line, then go with it. At some point, all of us must stop worrying and start living, like entrepreneurs.
If you want to think like an entrepreneur, look at every decision through a similar lens. Don’t take wild actions where you’re not sure of the outcomes. Rather, do the calculus, manage each risk element, and understand how you can both achieve an amazing outcome while also being OK with the result if it all falls apart.
That’s how you can evolve from being a risk taker into becoming a risk manager.