Understanding your appetite for risk requires a great deal of self-awareness. It is immensely valuable, but there’s no magic formula.
Lets talk about risk
Our appetite for risk in the business world is unique to each and every one of us. It is layered and complex, involving many variables such as our upbringing, financial situation (debt, savings, etc…), education, dependents, health, ambitions, and much more.
The feelings we hold toward risk are muddied by our sub-conscious and conscious mind. Put simply, we are left with facts and gut feeling; what you know to be true, e.g. “I earn X and spend Y“, and what you feel, e.g. “I am afraid to quit my job“.
Only you can gauge your appetite for risk*. Looking at the profiles of entrepreneurs portrayed in the media, it might be easy to think risk is binary; risk-tolerant or risk-averse. A more realistic and inclusive representation is a scale, with each of us scoring differently. A value that changes as life progresses.
Risking it all
When I quit my job and started my first company at age 24, my appetite for risk was at its prime. I had graduated college 3 years earlier, and had been fortunate to find a position I enjoyed and thrived in. I was living in an apartment with 2 friends in Dublin, Ireland, and my monthly expenses were around. €1,800 ($2,060).
With modest financial commitments, no dependents and my life ahead of me, I had nothing to lose. In order to quit and start my business, I raised €50k from friends and family. Thanks to a low monthly burn rate*, this bought me significant runway (time until cash ran out), and put me in a position to risk it all.
With a burning desire to realise my vision, I was physically, mentally and financially equipped to pursue my startup with everything I had in me. And boy did that turn into one hell of a rollercoaster ride over the course of 3 years. Here’s a glimpse of how it ended, but more on that another day…
Don’t get me wrong, I was terrified. But the circumstances gave me comfort in taking this leap of faith. And that in turn gave me the confidence and grit I developed over time. As my first true entrepreneurial stint, I also discovered my utmost limits, and how far I was capable of pushing myself – a risk in its own right.
A calculated approach
Fast-forward 8 years; married, expecting our first child, saving to buy our own home, building an investment strategy for retirement. My monthly expenses that have grown roughly 4x.
This puts me in a very different position today. A ramen profitable approach to building a startup is not an option for me anymore, leaving me with two options; achieve certain financial goals that reduce my fixed monthly expenditures, or continue to build, bootstrap and validate startup hypotheses far enough to warrant the risk.
“Ramen profitability is … a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing” 1
My desire to build a successful company has not changed, but my appetite for risk has. In hindsight, when I risked it all as a first-time founder, I did so with little preparation, blind ambition and naivety. But, it allowed me the opportunity to make the the mistakes I learned invaluable lessons from.
Today, I am faced with more constraints than I was then. However, the knowledge, experience and network I’ve gained allows me to be more fruitful with my time and focus my energy. As I think about building a business now, I think about how far I can get without raising external capital or quitting my job; de-risking the journey.
Risk is not a constant
Our appetite for risk is ever-changing. I’ve highlighted two personal extremes to reflect this. And it’s inevitable that this will change again.
There are many variables in our life that can and will change. The most tangible of these (in my opinion) is your financial situation. Roughly translated: do I have more or less disposable income to do X?
The less tangible are the building blocks that make up who we are. Our mind and behaviour. A topic I am not qualified to talk about, so I will only be reflecting on my own psychology.
My exposure to risk as a child was normalised by seeing my parents and their siblings, all take an entrepreneurial path. This gave me an advantage in that I saw nothing unusual about starting a business when it came to it. But even this view of the world changed over time as I grew older and began my own journey.
What’s your appetite for risk?
It’s clear that certain peoples circumstances put them in optimal positions to take on risk, while others will be excluded from the entrepreneurial experience.
As a first-time founder you will likely not discover your true appetite for risk until you’ve actually taken the plunge and experienced the outcomes firsthand, primarily failure.
Avoid comparing yourself to other founders. You will never have the full picture of another persons risk profile, so focus on your own, and make decisions that work for you.
Each persons appetite for risk is unique. Understanding where you fall on the scale can help you maximise how you pursue your ambitions. If you are fortunate to be in the same position I was when I started out, and are considering taking the plunge, just remember that mistakes will never be as cheap as they are now.
[*] This can make it quite difficult for co-founders who do not know each other well enough to judge each others suitability. With first-time founders, this remains an unknown until you’ve been through it.
[*] The burn rate is used by startup companies and investors to track the amount of monthly cash that a company spends before it starts generating its own income – Investopedia