This article originally appeared on Forbes.
For my money, there’s no better crash course in risk management than the documentary, Free Solo. To most, the thought of climbing 3,200 feet up the granite face of El Capitan in Yosemite National Park is daunting enough. But free-climbing it without any ropes is just pure insanity. Or is it? When Alex Honnold decided to climb El Capitan, it wasn’t just on a whim. He had spent more than a decade planning his ascent, logging dozens of climbs up and down the granite face, most of it roped in, so he could examine every crack and crevice.
“I try to expand my comfort zone by practicing my moves over and over again. I try to work through my fear until it’s not scary anymore,” says Honnold. Essentially, he did everything possible to minimize the risks that would be in his control, while learning to be at peace with the things he couldn’t control. He turned El Capitan into a mathematical equation. “I like to think the risk, the chance of me falling, is extremely low while the consequence is extremely high,” he says.
How Risky Are You?
Did you know there’s a national ‘Take a Chance Day?’ It’s every April 23, and it’s one of more than 1,500 national days. But unlike National Brisket Day or National Paperclip Day, this day holds some real merit (I do love brisket though).
Think about what could happen if hundreds of thousands of Americans decided to take a real chance. I’m not talking about running down to the gas station and buying a dozen lottery tickets. I’m talking about moving out of your comfort zone and taking at least one step toward your dreams. Maybe it’s going back to school. Maybe it’s quitting your job and starting a business. Maybe it’s buying a plane ticket for a trip you’ve always wanted to take.
If you’re a small business owner, chances are you’ve always been a bit of a risk-taker. Part of it is situational, and a good chunk of it is inherent in being an entrepreneur. A Lendio survey of 2,000 small business owners reveals five groups of business owners who are more likely to take a chance on any day of the year.
- The Young: Business owners between the ages of 18 to 34 took more risks when starting their businesses. These respondents also said that in retrospect, they wish they had taken more risk when they were young. Business owners 45 years or older said they played it safe. They were also less likely to say that taking risks leads to “a lot” of growth in business.
- Men: More male business owners (42%) took a lot of risks early on vs. female owners (33%). Additionally, 75% of men believe taking on debt leads to business growth, compared to just 66% of women.
- New Business Owners: Business owners who have been in business for five years or less took more risks when starting out. They also wish they had taken bigger chances. Conversely, owners in business for 11 years or more tend to be less risky as a whole and have a less positive outlook on the benefits of taking risks.
- Those With Lower Incomes: Business owners who make $30,000 a year or less took more risks when starting out, and they also reported a more positive view on the benefits of taking chances.
- The Engaged: Turns out, of all the relationship statuses, those who identify themselves as engaged take more business risks. The majority of engaged owners reported taking a lot of business risks (64%) vs. those in other relationship statuses (40%).
Taking Risks vs. Being Risky
Several years ago, I wrote about Why 20-Somethings Are The Most Successful Entrepreneurs. Young entrepreneurs have nothing to lose; they can swing for the fences. They look to solving problems with a completely different mindset than older, more experienced business owners. They also know that even when they do fail, they’re creating some of the most valuable learning experiences of their lives.
But whether you’re young or old, male or female, engaged or otherwise, it’s important to understand the difference between taking risks and being risky.
Taking risks is part of our lives, whether we like it or not. Every time we get in a car, we are trusting that other drivers around us will obey the rules of the road or that a wheel doesn’t fall off while traveling at 70 mph. Most of us have already learned to resolve the classic risk vs. reward equation in our heads — we’re willing to take on certain risks in order to enjoy valuable rewards. Conversely, being risky involves doing things with much higher failure rates and much more serious consequences. Driving while under the influence, at excessive speeds or while texting are all examples of being risky; the consequences can be severe and are a direct result of careless actions.
Calculating Risk in 3 Steps
Lendio recently acquired a company we feel has significant upside. We put real dollars at risk. In order to minimize that risk, we also spent more than a year analyzing every detail of the company and understanding our target market. I’ve been in many situations like this as an entrepreneur. Though decisions still weigh heavily on me at times, I’ve developed an effective three-step process for calculating risk vs. reward.
- Remove the Fear of Failure: Fear of failure is the number one reason why most people avoid risk. In most cases, it’s not a life and death situation like Alex Honnold’s, but we still let fear hold us back. Too often I see business owners suffering from classic analysis paralysis; they get so bogged down by fear of failing they never make a decision. Turn fear on its head by examining the cost of not taking a risk. Can you afford to keep playing it safe?
- Do the Math: Yes, it is important to literally do the math when weighing risk vs. reward. Examine all the ways you can fail and what it will cost you. Then think about how you can push the limits just enough to make some mistakes and learn quickly. From there, adjust your direction and go. Realize that along the way, some decisions will be wrong. Also realize that you’ll get more comfortable with that. Be open to making course corrections to get back on track.
- Let Others Challenge You: As an entrepreneur, the higher the risk, the more homework I do. In the case of the recent acquisition, I pushed my team to come up with a list of the reasons why it won’t work. Then I asked them to challenge me on it. With the risks more clearly defined, I felt comfortable making the final gut call to move forward with the acquisition.
No Rope, No Problem
Of course, you don’t need to wait for a national day to broaden your risk-taking horizons. For business owners, every day presents the opportunity to weigh risk vs. reward. Maybe you’re considering whether to take out a loan, whether to seek a new business partner or whether to try a new marketing campaign. Don’t forget the other side of the equation. What is the opportunity cost of not taking that loan, not bringing on that new partner and not testing new campaigns?
When it comes to taking chances in business, don’t let the fear of failure sideline your potential growth. Do your homework, consider all the mathematical equations and let others challenge you. Then practice your moves over and over again until you’re comfortable enough to climb that mountain.