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.
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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.
The successful gamblers are the ones who calibrate risk management, where they won’t go all in unless they are sure they will win. They spend a lot of time thinking about the downside and what they will do in case things don’t pan out as expected so that they can live on to fight another day.
Unfortunately, reality gets distorted in the startup ecosystem, because everyone is trying to glamorise successful founders. Risk management in startups involves a lot of discipline, and is boring mundane work – not the stuff which makes for racy reading!
It requires that you use a structured process to make sure that you don’t do stupid things. This is why having an investor who provides adult supervision can be so useful. He can curb your unrealistic enthusiasm, and make sure that you don’t end up going 100 miles per hour into a brick wall with bad risk management, simply because you’re so passionate about your dream, that you have lost touch with reality!
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]