All Risk Isn’t Risky

Risk comes from not knowing what you are doing.
—Warren Buffett, businessman, investor, philanthropist.

Among the several definitions of an “entrepreneur,” some are pretty good while others are downright terrible. Regardless, a common word among them seems to be “risk,” which is what truly defines an entrepreneur. The following simple definition by Merriam-Webster is one of the best: “An entrepreneur is one who organizes, manages, and assumes the risks of a business or enterprise.”

The focus then becomes understanding risk and how it factors into being an entrepreneur. “Risk,” as defined by the same dictionary, is the “possibility of loss.” What’s most interesting about this definition—and contrary to popular belief—is that it doesn’t impart a negative value judgment; the definition merely declares the possibility of loss. In other words, an event can have a 1 percent or a 99 percent probability of loss. Our response to and interpretation of those two levels of risk makes all the difference.

Entrepreneurs have a higher tolerance for risk than the average person when it comes to starting and running a business. According to the Kauffman Foundation, less than 80 percent of businesses last after their fifth year of existence. Moreover, according to Saratoga Venture Finance, less than 1 percent of businesses ever go public. Despite these daunting odds, entrepreneurs are not deterred from pursuing their goals.

This higher tolerance of risk among entrepreneurs, though, doesn’t tell the whole story. Entrepreneurs surely take on high probabilities of failure, but they don’t necessarily like to gamble. Instead, they take calculated risks, stacking the deck in their favor. They find ways to minimize or to spread the risk of their endeavor to increase the odds of their success or minimize the odds of loss. Entrepreneurs have the confidence in themselves to avoid and to overcome obstacles that could cause great loss, whether through expert knowledge, solid relationships, or even personal wealth.

For example, the media tend to emphasize the Cinderella stories of CEOs who have achieved great success despite unfavorable odds. However, a closer look at these stories often reveals that the CEOs took calculated risks and had solid backup plans. In his book The Reluctant Entrepreneur, Michael Masterson describes how Bill Gates is frequently perceived as a college dropout who took a huge risk to start Microsoft. Masterson criticizes this perspective and paints a very practical picture of Gates, one that portrays him as a methodical, brilliant youngster who always planned to return to school if his business venture didn’t work out. Perhaps Gates’s decision to leave Harvard would have been riskier and thus worthy of the media spin if he weren’t so smart and didn’t have the great financial resources that his well-heeled parents gave him.

In short, all risk isn’t risky, and entrepreneurs know this rule. Put another way, the reality of becoming an entrepreneur isn’t so much about the high probability or risk of failure as much as your ability to beat the odds. Ironically, the entire world has learned this lesson from the Great Recession. The opposite of this rule is just as valid. What people thought was safe is no longer as safe as they thought. College won’t guarantee you a high-paying job in the field you studied once you graduate. A corporate job doesn’t mean you won’t get fired. Enrolling in your company’s 401(k) plan doesn’t mean that you will have more money in the bank than when you started the plan. If the world continues on a path of economic decline, pursuing your entrepreneurial dreams will be less risky than getting a job. And that’s not such a bad thing.