Do you think that entrepreneurship as a profession didn’t bring risk to you? Are you an entrepreneur who doesn’t want to take any risks when deciding to start with this profession? If there is a risk, how much risk tolerance do you have?
If you are already an entrepreneur, I think you are not a person who doesn’t take a risk, because you already have taken some risk when you decide to start your company.
Entrepreneurship is closely related to risks and risk-taking from your side as an entrepreneur. You cannot become an entrepreneur without some risks that you must take.
Why there is a risk for entrepreneurial ventures?
You invest the money that you have in your pocket is something that you don’t know if it will bring you more or the same amount of invested money in the future. That’s the first initial risk that you as an entrepreneur take on yourself and in most cases on your family because you must short their satisfaction of needs in exchange for the required financing of your company.
You’ll never be 100% sure about the future of your business. Also, you’ll never know with 100% precision how successful will be your company or how much money you’ll earn in the first, second, or third year. Because of that, there will always be risks in entrepreneurial ventures that you want to start.
The question that each potential or future entrepreneur need to answer before he or she decides to leave a current job and become an entrepreneur is: Is it worth starting a company compared with the future if you didn’t take this step? In many cases, this will be related to your risk tolerance and fear you have related to this risk.
Risk Tolerance Question #1: Can your current potential provide surviving?
Each company in most of the cases in the early startup stage is based on the entrepreneurial potential to bring that business into life. You’ll need to invest your time, your money, your knowledge, and your skills into the future of your business.
You can’t start a business without your commitment to it. That commitment will need your time. You can’t start a business without money, because you’ll need to provide all requirements for normal business operations in the future, as an office, equipment, raw materials, etc. Also, you can’t start a company if you don’t have enough knowledge about the industry of your new business, the market where it will operate or products and services that it will offer to the market. You’ll also need different skills that are much more than the skills required if you have corporate work. You’ll need to have negotiation skills, analytical skills, sales skills, networking skills, etc.
How much more you have to invest, there will be more risk for you as a potential entrepreneur. If there is more risk, more critical will become your risk tolerance for the success of your business.
As a first answer these questions about yourself:
- How much money do you have, or you can find to finance your company?
- How much time can you invest in building your company?
- Do you have enough skills and knowledge to start such a company?
The real example of the entrepreneurial nightmare and risk tolerance
I know an entrepreneur who before several months left a large corporate work where he has a solid salary ($7.000 monthly) and starts his own company. He didn’t expect to earn such a salary, but he also didn’t expect that the new company will eat his cash in the first three months.
In such a way an entrepreneurial excitement easily becomes an entrepreneurial nightmare. Why did this happen in most of the cases?
First thing is that he didn’t make a real scan and analysis of his possibilities to start a business. He has money, but the start-up process costs more than his predictions. Second, he didn’t make a proper sales prediction. Sales and cash flow in the start-up stages are the most important things for small businesses. If it doesn’t have sales, then he must invest his own money to survive this stage of his newly created company.
If I recapitulate the example of this entrepreneur we can tell that:
- He invests his time with a large commitment to transfer his business idea into the real company.
- He invests his money in the new entrepreneurial venture, but he didn’t realize that it will not be enough because of the lack of proper sales forecasting for the future. And money becomes the biggest problem for the future of his business success.
- He knows the business in general.
- He hasn’t enough skills in planning, managing, and finances. This lack of skills is something that brings problems after three months of operations. He used aggressive marketing campaigns in the first month after start-up but didn’t have a proper system to measure the results of those campaigns. In such a way, he spent too much money on advertising without real results for his company.
Risk Tolerance Question #2: How much you can earn with your business?
As an entrepreneur, you must make predictions about the next five to ten years about how much you can earn from your company. It is not the whole income from the company, but how much will remain you after you pay all expenses and taxes.
For example, your sales in the first year will be $400.000. After paying expenses and taxes, you have only $50.000. You predict that your sales will increase with a 10% annual rate with the same percent of expenditures and taxes after ten years you can earn $647.500.
Risk Tolerance Question #3: How much can you earn if you stay at your current job?
Now when you know how much you can earn for ten years if you start your company, you must compare that sum with the sum that you can earn if you stay at your current job.
Let’s say that you have an annual salary of $50.000 with all benefits you will earn. That is $500.000 for ten years.
Now, what do you think is it worth starting a company and leaving a current job to earn $147.500 more for ten years?
This is the first part of analyzing your risk tolerance for startup entrepreneurs. You can read the second part where we continue with this example in the post titled “There is much more in risk calculation.”
Question: Do you have experienced problems with your business startup? What are the most significant risks that you have experienced?