We all know that startups are risky. There’s no certainty that they will succeed and, even after putting in four or five years of hard effort and spending a lot of money – either your own, because you’ve bootstrapped or taken money from investors – you may still be forced to shut down, because you’ve not been able to become profitable. This is the nature of the beast without proper risk management, and we need to accept it if we want to go down this path.
However, there’s no point in taking senseless risks.
The problem is that lots of founders admire entrepreneurs like Steve Jobs, and they believe that the reason he was so wildly successful was because of the outsized risks which he took. He becomes their role model, and they selectively remember these stories, simply because they are so unusual.
However, we need to understand that a lot of these stories get distorted in the telling, especially when they are retold by a successful founder, who sugar coats everything. He hides a lot of the false starts and errors which he made, so the final sanitised version, which the media reports, is very different from reality.
The press also loves publicising these kinds of stories because they want to give the hero a larger than life personality. This is why entrepreneurs get misled about risk management in startups. Yes, it’s important to dream big, but that doesn’t mean you need to be stupid or take unnecessary risks, because this can come back to haunt you.
Intelligent risk management means that you need to do stuff one step at a time.
Yes, it’s true that you cannot leap a chasm in steps, but you do need to identify the stones one at a time when crossing a river. You need to understand what you can afford to lose; and create a safety net, by being acutely aware of your risks when you try something new. You need to be able to take affordable risks so that even if you fail, this does not spell the end of your company.