Being Conservative vs. Taking Risks: Why You Need Both
Life needs balance.
Great investors don’t just include high-risk investments in their portfolio. A great portfolio is diversified. It consists of both low- and high-risk investments. Holding a lot of low-risk investments ensures that even if a high-risk project goes down, it doesn’t quite hurt as bad.
Life works the same way.
If you asked me whether or not you should get started with a startup full-time, here’s what I would tell you: become financially secure first. If working on your startup for a year without making any money wouldn’t destroy you financially, then go for it.
And yes, there’s a lot of people for whom this can work:
- Fresh graduates who are single, live in their parents’ home and have hardly any costs
- Employees who have worked a high-paying job for a while and have accumulated a lot of savings
- Couples whose partner has a stable job and is willing to support the other partner while he or she is trying to build the business
- Part-time founders who have already gotten far enough with their business to secure investment
A startup is a high-risk endeavor. You should only get involved in one, if you are sure that your financial situation is secure. Otherwise, the mental pressure is going to break you.
80% stability and 20% risk
As a rule of thumb, I’d say that 80% of your resources should be invested in projects that are stable and secure. That leaves 20% of your resources for high-risk endeavors with a potentially large ROI.
This applies to pretty much anything:
- You can spend 80% of your time working a stable job and 20% of your time working on a side project
- You can invest 80% of your money into stock or real estate and 20% of your money into startups
- You can take one year off to work on a startup, after you’ve worked your ass off for eight years while saving a lot of money
Obviously, there are differences in personality. People deal with risk differently. Some are more willing to accept risk than others. There is no one rule that works for everybody in every situation.
But one thing is the same for everybody: we all have a need for stability, safety and security. This is the one need that always must be fulfilled. If it isn’t, then it drives us crazy. Lets us quiver in fear. Destroys us.
Stability comes first.
Everything else comes second.
High risk = high reward ?
High risk doesn’t necessarily mean high reward. Low risk doesn’t necessarily mean low reward. It is very much possible to start a project with a relatively low risk of failure and push it forward with consistency and effort, until it is extremely profitable.
The keyword here is consistency and effort.
Let’s say you are thinking between opening a coffee shop and running a tech-startup. Obviously, there’s a huge difference between these two kinds of businesses. The coffee shop has a comparatively low risk of failure, but it’s extremely difficult to scale.
It’s difficult to scale, but it isn’t impossible.
With consistency and effort, you can turn your coffee shop into a chain and create a giant like Starbucks.
But here’s the point:
Projects with higher risks have the potential to achieve higher returns in a much shorter time-frame.
As an entrepreneur, your job is to make a decision around (1) how much risk you are willing to take (2) for what kind of potential return and (3) in which time-frame.
The fear of entrepreneurship
There’s still a huge part of the population right now that is scared of business and entrepreneurship. They equate going into business with taking huge risks.
And quite honestly?
If you look at entrepreneurship it in the way that it is portrayed by the media…. then this fear is quite justified.
We are living in a time, where tech-startups are being hyped. As startups are becoming the most trendy career choice of all, more and more people choose this path.
The message is that there is only one way forward —to forget about being an employee in the hamster-wheel, take all the risk upon yourself and simply push forward with sheer willpower.
In most cases, that is incredibly foolish. In fact, there is no one “best” way to entrepreneurial success.
One person works as an employee for 20 years, then quits her job and builds a successful B2B business relying on her savings at first. Yet another works as a full-time freelancer and invests part of his income in building a highly profitable e-commerce shop on the side.
Entrepreneurship comes in many forms.
Your form of entrepreneurship is what you want it to be. It is up to you to decide how much risk you want to take. Just never bet your future on a single high risk endeavor without the required financial security — that’s gambling, not entrepreneurship.
Key learning points:
- Smart entrepreneurs diversify their income streams, maintaining a balance of high- and low risk endeavors.
- The best way to get started is by starting small. Go full-time into a project only when you are financially secure.
- Never have the expectation to make “big money” anytime soon. This will only lead to your own doom.
- Always make sure that the risks you take are calculated risks. Make sure that even if the worst case scenario happens, it wouldn’t break you.
- Whenever you think about starting with a venture, put yourself into the perspective of an investor. Ask yourself: “would I be willing to invest my own money into that project if it wasn’t my own?”
This story is published in The Startup, Medium’s largest entrepreneurship publication followed by +413,678 people.
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